Applicability of SARFAESI Act for NBFC

The SARFAESI Act now extends to Non-Banking Financial Companies. The Scope of the term "Financial Institutions" has become more extensive and included Non-Banking Financial Institution in its ambit. Ministry of Finance has notified 196 companies regarding their inclusion in the definition after the amendment.

SARFAESI act refers to The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2016. The Ministry of Finance has notified 196 NBFC companies which have been brought under the definition Financial Institution under the SARFAESI Act.

This announcement comes after the budget announcement in the year 2015-16; it has allowed the applicability of SARFAESI to certain NBFC’s

SARFAESI Act is a legislation that helps financial institutions to ensure asset quality in many ways. It mainly helps in addressing the problem of Non-performing assets. SARFAESI act gives power to banks and financial institutions to take over the immovable property that is hypothecated or charged to enforce the recovery of debt. SARFAESI act declares Loan as a non-paying asset (NPA) only when the installment on principle is due for more than 90 days or more. SARFAESI act is applicable on loans greater than ten lakhs only.

Power of NBFC’s and Banks under SARFAESI act

• Take possession of the assets which are hypothecated
• to sell the assets which have been hypothecated; If the borrower has already sold the asset to a third party, the third party can be ordered to surrender the asset

With the significant changes that favour SARFESI act by 2016 amendment bill, the NBFC companies are also brought up to the power of banks. These changes have been implemented to 196 companies in total, which are systematically important Non-Banking Financial Company.

Related: Difference Between an NBFC and Bank

Applicability of CERSAI

The new amendment of the act provides that secured creditors would be unable to take possession of the collateral unless it is registered with the central registry under section 26 D of the act. If the security interest is not registered with the central registry and the new security interest is made on the hypothecated property, then the recent security interest will prevail.

NBFC’s which are covered by the SARFAESI Act are:

• 196 NBFCs which are notified by The Ministry of Finance on 5th August 2016
• All NBFCs having assets of more than Rs.500 crore according to their last audited balance sheet
• the Central Government informed certain NBFCs as public financial institutions under section 4A of the Companies Act,1956, such NBFCs are also allowed to exercise powers under the SARFAESI Act
• The value of security created and the amount of loan in favour of any NBFCs for the amount of debt should not be less than 1 crore.

The threshold set for other financial institution under the SARFAESI Act is Rs. 1 lakh only.

Can secured creditors avail benefits of SARFAESI Act even if proceedings are going on in the tribunal?

According to the recent amendment, a secured creditor can initiate proceedings under SARFAESI even if there is current proceeding going on with a different authority. The only thing which the secured creditor needs to do before filing an application under SARFAESI is to file a leave of absence with that particular authority.

Can arbitration proceedings and enforcement of security interests under the SARFAESI Act happen at the same time?

The amendment has not placed any bar on arbitration proceeding to go on simultaneously with actions which are conducted under SARFESI act. As both, the process aims at resolving the issue of Non-paying Assets

Conclusion

Bringing NBFC’s under the purview of SARFAESI act has brought in the much-needed reform for them. This amendment was done to bring parity in the regulation of NBFC with the other financial institution.

This amendment has solved the problem of NBFC’s by improving the recovering capability of the NBFC’s. NBFCs can now enjoy the benefits that were applicable only to banks.