ABOUT THE SARFAESI ACT:
SARFAESI ACT stands for Securitization and reconstruction of financial assets and enforcement of security interest Act,2002; established with the aim of giving authorization to financial institutions to dispose of the assets and properties by way of sale or auction, of the people who default on their borrowings and loans out of the court i.e. without the intervention of the courts. The act also deals in for the securitization of various baking and financial institutions, with or without any securities, dealing with the registering and regulating the Asset Reconstruction Companies (ARCs) whose governance is done by the RBI, by appropriate use of such ARC for easy transfer of the financial/assets so that the disputed assets can be bought by way of issuing bonds, debentures and other securities; from the institutions indulge in such banking and financial activities. The act also deals with loan companies which are financial associations that offer credits for any reason other than that of AFCs are called Loan Companies. They likewise incorporate lodging fund firms. NBFC also forms part of such a category.
NBFCs and loans from NBFCs:
NBFCs are non-banking financial companies as the name states that provide some financial services like that of banks but are not licensed as banking entities. On 24th February 2020, the Ministry of finance by its notification declared the NBFCs as Financial Institutions for the very purpose of the SARFAESI ACT. The NBFCs are required to be registered with RBI, whose asset size should be worth rupees five hundred crores and above and are defined under section 45-I clause (b) of the Reserve Bank Of India Act, 1934.
The NBFC having assets up to 100 crores or more and whose liability/debt should not be exceeding 50 lakhs are eligible to be called a financial institution under SARFAESI ACT. NBFCs are considered financial institutions under section 2 (m) of the SARFAESI act and thus SARFAESI act allows banks and financial institutions to attach pledged assets of the borrower in the case where the borrower fails the payment of dues to him. As a result, these non-banking financial institutions were eligible to reclaim loans for secured debts exceeding Rs. 50 Lakhs as mentioned in the notification dated 24/02/2020; However, this limit to reclaim loans for secured debts by non-banking financial institutions was amended and substituted with Rs. 20 Lakhs and above vide notification dated 12/02/2021.
Before the notification dated 24th February 2020, only those NBFCs are empowered to use the provisions mentioned under sections 13 to 19 of the SARFAESI Act, for the purpose of securing loan arrears by NBFCs who have security interest that could be utilized for the object of securing the repayment of secured debts where the amount of principal is rupees one crore and above. But this notification has relaxed these criteria.
Non-banking financial companies can now have the authority to the collateral pledged by the debtors, for secure loans when people default on their dues. This makes it easier for non-banking financial companies to cut losses and recover defaulting loans without having to wait for the case to be taken to the courts, which would be the case if the case were brought before a court. It also lowers the market risk that these non-banking financial companies face.
Loans by the NBFCs and procedure under SARFAESI Act:
As the NBFCs are covered under the SARFAESI Act and get the status of the Financial Institution, thus now the NBFC can have the advantages of the recovery procedure as given under SARFAESI Act; which includes Securitization, Asset Reconstruction, and implementation of the securities without the interference of the court. As per the said act, the NBFC is empowered to retain and attach the assets/properties of the borrowers who have defaulted in payments of their dues. The procedure under the act, such financial institutions will serve a notice to such defaulters and notify them to repay their dues within 60 days duration and if failed to do so by default borrowers the act empowers the financial institutions with the recourse of that is to-
- To take possession of the security charged against the loan/debt.
- To give the security on lease or sell it or transfer the rights of the security.
- To manage the same by itself or to assign this work by appointing an individual.
Conclusion
In a nutshell, the process to be followed for the recovery of loans by NBFCs as per the SARFAESI Act is that – the initial borrower deposits the security with the banks or financial institutions and gets the financial assistance and if any default is done on the part of the borrower than the 60 day period is followed then the role of Asset Reconstruction Company (a financial institution formed specially to buy the nonperforming assets and not good assets from the banks and financial institutions so that the financial institutions can get away with the bad assets) come into play which performs its work and after it seeks for the qualified buyer and the ARCs exchange the cash and security receipts with the qualified buyer and settle the loan which is defaulted by the borrower.
Written By: Jay Parihar
