Introduction 

By increasing the availability of financial services, fostering entrepreneurship, and diversifying the industry, NBFCs have been augmenting the banking system. In accordance with the Economic Survey of 2010–11, NBFCs in India made up 11.2% of the financial system’s holdings, and yet, earlier NBFCs (Non-Banking Financial Companies) were kept out of the ambit of the SARFAESI Act,2002 (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act). 

Considering that the SARFAESI Act, 2002 helps banks and other financial institutions to collect their non-performing assets (NPAs) without the involvement of the courts, an amendment in this domain was considered crucial, according to the research, which was undertaken collaboratively by the business chamber Assocham and consultancy firm Resurgent India. Later, the late former Finance Minister Arun Jaitley announced in the 2015-16 Budget that certain NBFCs would be allowed to use SARFAESI to recover defaulted loans.

NBFCs entered under the purview of the SARFAESI Act, 2002

Wide notification dated 24th February 2020, the Ministry of Finance exercising its powers under section 2(1)(m)(iv) of the SARFAESI Act, declared and notified that NBFCs are qualified under the SARFAESI Act to enact security interests on debts totaling at least Rs. fifty lakhs and above.

The threshold for Applicability of the SARFAESI Act on NBFCs reduced to debts totaling at least Rs. Twenty-five lakhs lacs and above: 

 Wide notification dated. 12th February 2021,  the Ministry of Finance exercising its powers under Section 2(1)(m)(iv) of the SARFAESI Act, declared and notified that NBFCs that have assets of at least Rs. 100 crores are qualified under the SARFAESI Act to enact security interests on debts totaling at least Rs. Twenty-five lakhs lacs and above:  

Eligibility check of whether the NBFC can enforce security interests under the SARFAESI Act, 2002 :

• Any NBFC is eligible to enforce the security interest under the SARFAESI Act, 2002 if it has complied with the mandatory registration of security interest as mentioned in Section 26 (D) of the SARFAESI Act, 2002
• Any NBFC is eligible to enforce the security interest under the SARFAESI Act, 2002  on debts that amounts to a minimum of Rs. 25 lacs. if the minimum asset size of the NBFC is 100 Crs. 
• Any NBFC is not eligible to enforce the security interest under the SARFAESI Act, 2002 on the debts even if the debt amounts to a minimum of Rs. 25 lacs if the asset size of the NBFC is less than 100 Crs. 
• Any NBFC is eligible to enforce the security interest under the SARFAESI Act, 2002 on the debts even if the debt amounts to a minimum of Rs. 25 lacs, even where the origination of the financial assistance took place before the date of notification.

Effects of this Amendment : 

Additionally, this is anticipated to enhance their capacity to collect smaller debts and enhance the financial stability of NBFCs with low-value, underperforming assets. Due to the reduced qualifying threshold, NBFCs, or Non-Banking Financial Corporations, are now responsible for enforcing security interests on smaller loans. For secured loans, if the debtors are unable to repay the loan, NBFCs can now get claims to the collateral secured by the borrowers. This lessens the market risk that these non-banking financial enterprises must deal with and provides a significant boost to assist them to decrease expenses and expedite the repayment of defaulting loans without the delays required in taking the matter to court.

Conclusion: 

The SARFAESI Act’s implementation on NBFCs provides a significantly required opportunity for such companies to compete on an equal footing with banking institutions of credit recovery from the financial debtors. The NBFCs used the legal, arbitration, and self-help channels for effective claims earlier, and their results were superior to those of the banking institutions.  The future of recovery for such Non-Financial Companies appears to be a simple one now that the NBFCs have recourse to the SARFAESI Act. It is unquestionably preferable to civil litigation, in which there is a long-standing period for disagreements to be resolved.

Written by: Adv. Dhrutika Barad