SARFAESI Act for NBFC
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is a key legislation in India that empowers banks and financial institutions to recover non-performing assets (NPAs) without court intervention. Initially designed for banks and certain financial institutions, its applicability has been extended to Non-Banking Financial Companies (NBFCs) under specific conditions.
Applicability to NBFCs
The Central Government, through a notification dated February 24, 2020, expanded the scope of the SARFAESI Act to include certain NBFCs. As per this notification:
Eligible NBFCs: NBFCs with an asset size of ₹100 crore or more (as per their last audited balance sheet) are classified as “financial institutions” under the SARFAESI Act.
Threshold for Action: These NBFCs can invoke the SARFAESI Act to enforce security interests for secured debts amounting to ₹50 lakh or more. However, a subsequent revision in 2023 lowered this threshold to ₹20 lakh, making it easier for NBFCs to take action on smaller NPAs.
This extension allows qualifying NBFCs to use the same recovery mechanisms as banks, such as taking possession of secured assets (e.g., immovable properties like residential or commercial units) and selling them to recover dues, bypassing lengthy court processes.
Key Provisions for NBFCs
Secured Loans Only: The SARFAESI Act applies exclusively to secured loans where a security interest (e.g., mortgage or hypothecation) has been created. It does not cover unsecured loans.
NPA Classification: A loan is classified as an NPA if the borrower defaults on repayment for 90 days or more, aligning with Reserve Bank of India (RBI) guidelines.
Process:
The NBFC must issue a 60-day demand notice to the borrower under Section 13(2) of the Act, specifying the outstanding amount and requiring repayment.
If the borrower fails to comply, the NBFC can take possession of the secured asset under Section 13(4), sell it, or appoint a manager to manage it.
Exemptions: The Act does not apply to:
Loans below ₹1 lakh.
NPAs where the outstanding amount is less than 20% of the principal and interest.
Agricultural land.
Certain contracts (e.g., hire-purchase or leases) where no security interest exists.
Benefits for NBFCs
Faster Recovery: NBFCs can recover dues efficiently without relying on civil courts or Debt Recovery Tribunals (DRTs) for initial enforcement.
Reduced Risk: Access to collateral reduces financial losses from defaults.
Level Playing Field: Aligns NBFCs with banks in terms of recovery powers, boosting their operational stability.
Limitations and Safeguards
Borrower Rights: Borrowers can challenge the NBFC’s actions by approaching the DRT under Section 17 of the Act and further appeal to the Appellate Tribunal.
Registration Requirement: Security interests must be registered with the Central Registry to be enforceable under the Act.
No Suit Filing Power: Unlike banks, NBFCs cannot directly file recovery suits with DRTs under the Recovery of Debts and Bankruptcy Act, 1993, limiting their recourse to SARFAESI-specific actions.
The inclusion of NBFCs under the SARFAESI Act, subject to the ₹100 crore asset size and ₹20 lakh debt threshold, marks a significant step in strengthening their ability to manage NPAs. It enhances their recovery framework, reduces dependency on judicial processes, and supports financial stability in the non-banking sector. However, NBFCs must adhere strictly to the Act’s procedural requirements to ensure compliance and fairness to borrowers.
The SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) provides a framework for the enforcement of security interests by secured creditors, primarily banks and financial institutions. Recent developments have expanded its applicability to Non-Banking Financial Companies (NBFCs).
Key Provisions for NBFCs under the SARFAESI Act
Eligibility Criteria: As per the notification dated February 24, 2020, NBFCs with assets of INR 100 crore or more can enforce security interests on debts of at least INR 50 lakh. This is a significant relaxation from the previous requirement that mandated an asset size of INR 500 crore and a minimum loan amount of INR 1 crore.
Notification and Compliance: The Central Government is empowered to specify NBFCs as “financial institutions” under the SARFAESI Act. Once designated, these companies can initiate recovery actions without resorting to lengthy court processes, provided they adhere to the stipulated notice periods and other procedural requirements.
Recovery Process: The SARFAESI Act allows creditors to take possession of secured assets if borrowers default on their obligations. The process involves issuing a notice to the borrower, allowing them a minimum notice period for repayment before taking further action.
Challenges Faced by NBFCs
Higher Thresholds Compared to Banks: Despite the relaxation in eligibility criteria, the thresholds for NBFCs remain higher than those for banks, which can enforce security interests on loans as low as INR 1 lakh. This disparity limits the effectiveness of the SARFAESI Act for smaller NBFCs.
Administrative Hurdles: NBFCs often face bureaucratic delays in recovering dues through SARFAESI actions. The need for approvals from revenue authorities for disposing of properties can prolong recovery timelines, complicating the enforcement process.
Litigation Risks: The increased eligibility may lead to a surge in litigation before Debts Recovery Tribunals, which are already burdened with case backlogs. While this expansion grants more rights to NBFCs, it also raises concerns about the efficiency of recovery processes.
The amendments to the SARFAESI Act have significantly broadened the scope for NBFCs in enforcing their rights over secured assets. However, challenges such as higher thresholds compared to banks and administrative inefficiencies remain critical issues that need addressing to enhance the utility of this legislation for smaller financial institutions.
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