NBFC

Applicability of SARFAESI Act for NBFCs

The notification dated August 5, 2016, issued by Ministry of Finance, in the exercise of its powers under SARFAESI Act, 2002 (Further amended by SARFAESI Act, 2016) has notified 196 NBFC under the definition of Financial Institutions as per the aforesaid Act. It was a major step in bringing out the NBFCs at par with the banks, focusing the manner in which recovery actions were taken by the NBFCs prior to this notification.

Further, apart from the above notified 196 NBFCs which were now covered under Act, there were some NBFCs notified as Public Financial Institutions by the Central Government, which were also brought under the purview of the SARFAESI Act to exercise their powers.

The notification came as a huge sigh of relief for the notified NBFCs giving them the confidence to lend freely. However, only a few NBFCs are currently covered under the criteria. This move has assured of greater confidence and speedier recovery for NBFCs lending against vehicles, property or other similar assets. The losses can now be arrested due to the attachment of the property of the wilful defaulters against the loans taken by them.

Criteria for Coverage of NBFCs under the SARFAESI Act

The SARFAESI Act does not examine the NBFCs for being covered, on the basis of Deposit-taking and Non-Deposit taking. Rather, it looks into the following points of concern:

1. The NBFCs shall possess a valid Certificate of Registration (CoR) under Section 45-I of the Reserve Bank of India Act, 1934;
2. The concerned NBFC shall have net assets of INR 500 crores or more as per the latest Audited Balance Sheet.
3. The amount of debt and the value of security created in favor of NBFCs for the amount of debt shall not be less than INR 1 crore.

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The threshold for the applicability of SARFAESI Act on NBFCs

As per the notification, the covered NBFCs are allowed to enforce their security interest only in the cases where the interest in the security has been cast to secure financial assistance having a value of INR 1 crore or more. On the contrary, apart from the NBFCs, the limit prescribed for another category of secured creditors is only INR 1 lac.

The rights under the SARFAESI Act is available even if the lender has initiated recovery proceedings through other methods. Moreover, under any scenario, the Act does not bind the lender to take resort only through the SARFAESI Act, when it seems easier for the lender to use other frameworks for the recovery proceedings. For instance, for movable properties, it is convenient for the NBFCs to take possession of the property rather than taking a resort under the SARFAESI Act.

On the other hand, it is a cumbersome process for the concerned NBFCs to take possession of immovable properties under the common law. In this case, they can look out for protection under the SARFAESI Act.

Is there any contradiction between the Arbitration law and the SARFAESI Act?

The conduct of the proceedings under the Arbitration Law does not prevent the NBFCs to take shelter under the SARFAESI Act. The process of arbitration is for settlement of the disputes as well as the SARFAESI Act promotes the enforcement of security interest. Both of the concerns are not contrary. Therefore, they can go hand in hand with each other.

Rights of NBFCs under the SARFAESI Act against an Insolvent borrower

The NBFCs shall not be entitled to take action under the SARFAESI Act against a borrower, whose insolvency application is launched, for a period of 180 days from the date of admission of the application, which may further be extended for another 90 days.

The aforesaid notification has acknowledged the notified NBFCs as the secured creditors. This encourages the notified NBFCs to register all the security interests in their favor even if they are created before being notified of the regulations.

Mandatory Registration of Security Interest under CERSAI

Section 26 D of SARFAESI Act states that the all the secured creditors including NBFCs are required to register the security interest under CERSAI, in the absence of which, they would not be able to enforce the security interest.

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Consequences of Non-registration of Security Interest by NBFCs

As per the section 26 B of the SARFAESI Act^[1], in case a secured creditor (including NBFCs) fails to register the security interest created in its favor and subsequent security interest is created on the same property in favor of someone else, the latter gets the sole rights of the registration. In this case, the right of the second secured creditor overrides the rights of the first unregistered creditor once the time of enforcement arrives.

Conclusion:

The applicability of SARFAESI Act to NBFCs brings a much-needed opportunity for the Non -Banking Financial Companies to stand at par with the Banks in terms of recovery of their credit. In the past, the NBFCs made use of the judicial, arbitral and self-help remedies for efficient recoveries, and their recoveries were better than that of the Banks. Now, with the NBFCs having access to the SARFAESI Act, the future of recoveries seems to be a smooth run for these Financial Companies. It is certainly better than the civil courts where there is a long waiting time to settle the disputes.