Finance minister Nirmala Sitharaman has proposed to lower the threshold for non-banking financial companies (NBFCs) to initiate recovery proceedings against loan defaulters under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. In her Budget speech, the FM proposed to lower the threshold of loan defaults to `20 lakh, compared to `50 lakh earlier.
“To improve credit discipline while continuing to protect the interest of small borrowers, for NBFCs with minimum asset size of `100 crore, the minimum loan size eligible for debt recovery under the SARFAESI Act, 2002, is proposed to be reduced from the existing level of `50 lakh to `20 lakh,” she said.
Veena Sivaramakrishnan, partner, Shardul Amarchand Mangaldas, said reducing the amount for taking SARFAESI action will provide lenders better access to fast track and out of court enforcement mechanism, which would lead to better discipline in the financing world. “The borrowers can no longer use long-drawn litigation as an excuse to delay on their contractual obligations and it is, therefore, a crucial step in ensuring quick recovery, which is a critical pillar in any financing,” she added.
Sonam Chandwani, managing partner at KS Legal and Associates, said relaxation in threshold for NBFCs under SARFAESI is likely to strengthen financial health of lenders and simultaneously improve credit discipline while continuing to safeguard borrowers’ interests.
“This move enables NBFCs to recover smaller loans thereby catering to a larger pool of loans, which ultimately strengthens their balance sheets and overall financial health,” she said.
FE learned that NBFCs had earlier requested the finance minister to reduce threshold limits for initiating recovery proceedings. In the absence of lower threshold limits, NBFCs had to file cases at civil courts for recovery. The recovery under SARFAESI is applicable only to secured loans. Under the SARFAESI Act, a lender can take possession of the property or mortgaged assets after a 60-day notice. The Act is applicable to home loans, loan against property and loan against collateral for micro small medium enterprises (MSMEs).