Sarfaesi Act - NBFCs Specified as Financial Institutions

The Central Government has released a notification dated 24th February 2020, specifying certain Nonbanking financial companies (NBFCs) as Financial Institutions under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. The notification specifies that Nonbanking Financial companies as defined under RBI Act 1934, that have assets more than or equal to 100 crores, will be treated as Financial Institutions under SARFAESI Act and be entitled to enforce a security interest in secured debts that are of Rs.50 Lakhs or more. The notification can be accessed below:

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Nonbanking Financial Companies

The Reserve Bank of India Act, 1934 defines nonbanking financial companies in section 45-I clause (f) as:

A financial institution registered as a company
A non-banking institution registered as a company and whose primary business is to receive deposits under schemes or lending of money in any way
Other non-banking institution, as approved by the Central Government

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act

The main objective of this act was to ensure Banks and Financial Institutions can recover defaulting loans which are non-performing assets without lengthy procedures in courts. The

SARFAESI Act assists in recovery of non-performing assets in three ways:

Securitisation: Acquire financial assets by agreement or issue of bonds or debentures
Reconstruction of Financial Assets: Debt restructuring, asset management etc
Enforcement of Security Interest: Right to enforce security interest by the bank or financial institution, with no intervention from the court

Impact of notification on Non-banking Financial Companies

With the new notification, Non-banking Financial Companies with assets worth Rs.100 crores and above will also be considered as Financial Institutions under the SARFAESI Act. Therefore, such nonbanking financial companies can now have rights to recover their loans from debtors for secured debts equal to or more than Rs. 50 Lakhs, and be entitled to enforce security interest. The security interest, in this case, is defined as a right granted by a debtor to a Financial Institution or bank over collateral because of which the creditor can have rights to the collateral if the debtor defaults in making payment for a loan.

Non-banking financial companies can now get rights to the collateral pledged by the debtors, for secure loans where the debtors are not able to repay the loan. This reduces the market risk faced by such non-banking financial companies and gives a big boost to help cut losses for non-banking financial companies and facilitate recovery of defaulting loans without the delay involved if the case is taken to the courts.

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Frequently Asked Questions

Common questions about SARFAESI Act.

The SARFAESI Act, or the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, is a legislation that enables banks and financial institutions to recover non-performing assets (NPAs) or defaulting loans without the intervention of courts. It facilitates the securitization and reconstruction of financial assets and enforcement of security interest.

The recent notification from the Central Government specifies that certain Non-Banking Financial Companies (NBFCs) with assets worth Rs. 100 crores or more will be considered as Financial Institutions under the SARFAESI Act. This allows these NBFCs to enforce security interest and recover secured debts of Rs. 50 lakhs or more, similar to banks and traditional financial institutions.

The SARFAESI Act empowers NBFCs to recover defaulting loans by enforcing the security interest on the collateral pledged by debtors. This reduces the market risk and potential losses faced by NBFCs due to non-performing assets. It also facilitates faster recovery of secured debts without the need for lengthy court proceedings.

According to the notification, NBFCs with assets worth Rs. 100 crores or more will be treated as Financial Institutions under the SARFAESI Act. This asset size criterion determines which NBFCs can benefit from the provisions of the Act.

The notification specifies that NBFCs can enforce security interest and recover secured debts of Rs. 50 lakhs or more under the SARFAESI Act. This means that the Act applies to secured debts equal to or exceeding Rs. 50 lakhs.

The SARFAESI Act defines security interest as the right granted by a debtor to a financial institution or bank over collateral. If the debtor defaults on loan repayment, the creditor can exercise their rights over the collateral or security interest pledged by the debtor.

The SARFAESI Act facilitates the recovery of non-performing assets through three mechanisms: securitization (acquiring financial assets by agreement or issuance of bonds/debentures), reconstruction of financial assets (debt restructuring, asset management, etc.), and enforcement of security interest (right to enforce security interest without court intervention).

The SARFAESI Act allows NBFCs to recover defaulting loans by enforcing the security interest on the collateral pledged by debtors, without the need for lengthy court proceedings. This expedites the recovery process and reduces the risk and potential losses faced by NBFCs due to non-performing assets.

The asset size criterion of Rs. 100 crores or more is significant because it determines which NBFCs are eligible to be considered as Financial Institutions under the SARFAESI Act. Only NBFCs meeting this asset size threshold can benefit from the provisions of the Act for recovering secured debts.

The SARFAESI Act provides a legal framework for NBFCs to manage the risk associated with non-performing assets and defaulting loans. By enabling faster recovery of secured debts and enforcement of security interest, the Act helps NBFCs mitigate market risk and potential losses, thereby strengthening their risk management practices.