Eligibility Criteria for Debt Recovery Reduced for NBFC’S: Under SARFAESI Act

The Ministry of Corporate Affairs (MCA) in its notification dated 24th February 2020 has notified that the eligibility limit for NBFC’s having assets worth Rs. 100 crore and above can be conferred the status of financial institutions. Financial institutions here are explained as per the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002.

What is NBFC (Non-Banking Financial Institutions)?

Non-Banking Financial Companies or NBFC’s are registered under the Companies Act, 2013 and are governed by the RBI. The activities of the NBFCs are similar to that of a bank but not precisely the same. NBFC’s do not perform the primary action of a bank which is accepting deposits from the public. NBFC’s are engaged in providing financial services such as disbursement of loans and advances, acquisition of shares or bonds, etc. NBFCs contribute to the growth of the Indian economy by providing alternatives for transforming savings into investments.  According to section 45-I (c) of the RBI Act, a Non – Banking Company which carries on the business as a financial institution will be an NBFC. NBFC registration is done according to the Companies Act 2013 and RBI Act, 1934.

Object

Finance Minister, Nirmala Sitharaman in an aim to address the ailing Non-Banking Financial Corporations or NBFC’S in her budget 2020 speech had proposed a reduction in the limit for eligibility for debt recovery for NBFC’S. This proposal is a saving grace to the NBFC’s as it will ease the ability of NBFC’S to recover loans from borrowers. The asset-wise eligibility criteria to be admitted under the debt recovery process have been reduced.

Threshold for Applicability of Sarfaesi Act on NBFC’s as per the Notification

• The prior eligibility limit for NBFC’s was Rs.500 crore of asset size or loan size of Rs.1 crore for debt recovery. 
• The eligibility limit for NBFC’s has been reduced to Rs.100 crore of asset size and Rs.50 lakh on loan size.

Key Features

• The reduction in eligibility limit for NBFC’s would mean that now NBFC’s or Non-Banking Financial Corporations debt recovery enforces the security interest for lower ticket size loans.
• This will also improve their ability to recover smaller loans and improvise the financial health of NBFCs debt recovery with all inadequate performing assets of lower value.
• The SARFAESI Act allows lenders to auction properties of defaulters to recover their dues.
• The rights under the SARFAESI Act will be available even if the lender has initiated recovery proceedings through other methods.
• More than 80% of cases in the NBFC sector are below Rs. 50 lakh bracket and hence the government should have considered a lower threshold like Rs. 5 lakh.
• According to CRISIL, a rating agency, the reduction for applicability under the SARFAESI Act is affirmative action. It will bring an additional of 12-15 per cent NBFCs’ loan against the property, which stands at around Rs 1 lakh crore on March 2019, under the SARFAESI Act^[1].

Takeaway

Y.S Chakravarti, Managing Director at Shriram City Union Finance said that the reason for NBFC’s not opting for the SARFAESI route lies in the administrative roadblocks in bringing such cases to a successful, time-bound closure. In the past NBFC’s have preferred to either arrived at a settlement with all the defaulting borrowers or by taking the National Company Law Tribunal (NCLT) route for recovery of the loan. The delay in recovering dues acts as a significant hindrance to NBFC’s contemplating action through the SARFAESI path. Many NBFCs were unable to dispose of the immovable property of defaulter borrowers even after filing the case under SARFAESI Act. It takes a long time to get a favourable income through the SARFAESI route because it takes a long span of time to seek permission from the revenue department. This new provision of decreasing the eligibility limit for NBFC’s will allow a number of NBFCs to move to SARFAESI for asset recovery.

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