Understanding the SARFAESI Act: Applicability for NBFCs

Introduction

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 is a critical legislation that empowers financial institutions to recover defaulted loans efficiently without court intervention. While initially limited to banks and select financial institutions, NBFCs can now leverage its provisions, provided they meet the eligibility criteria set by the Ministry of Finance.

Applicability of SARFAESI to NBFCs

NBFCs must meet the following eligibility criteria to be notified under SARFAESI:

1. Minimum Asset Size – ₹100 crore or more.

2. Secured Loan Accounts – Each account must involve a secured debt of ₹20 lakh or more (updated via Notification No. S.O. 652(E), 12.02.2021 Source).

Once notified, NBFCs gain the right to enforce security interests on defaulted loans without requiring court intervention. This significantly enhances their recovery process, similar to banks.

Key Benefits of SARFAESI for NBFCs

✅ Faster Loan Recovery

NBFCs can issue demand notices (Section 13(2)) and take possession of collateral (Section 13(4)) without delays caused by court procedures.

✅ Strengthened Creditor Rights

NBFCs can auction secured assets to recover dues, creating a deterrent effect against defaults.

✅ Reduction in NPAs

With effective enforcement mechanisms, NBFCs can manage and reduce non-performing assets (NPAs).

✅ Improved Investor Confidence

SARFAESI compliance signals robust risk management, attracting potential investors and institutional lenders.

Process for NBFCs to Get SARFAESI Notification

Step 1: Eligibility Assessment

Verify if the NBFC meets the ₹100 crore asset size and has secured loan accounts above ₹20 lakh.

Step 2: Board Resolution

Pass a formal Board Resolution authorizing the application. This must:

• Confirm eligibility, and

• Appoint an authorized signatory for documentation.

Step 3: Compile Supporting Documents

Prepare: ✅ Latest audited financials (to validate asset size) ✅ Sample loan portfolio summary (showing secured loans > ₹20 lakh) ✅ RBI-issued Certificate of Registration (CoR)   ✅ Board Resolution

Step 4: Submit Formal Request

Draft a covering letter addressed to: > The Secretary   > Department of Financial Services   > Ministry of Finance, Government of India

Include: 🔹 A summary of eligibility, 🔹 The purpose of the request, 🔹 Attached supporting documents, 🔹 Contact details of the authorized person.

Step 5: Await Notification

The Ministry of Finance periodically issues Gazette Notifications listing eligible NBFCs under SARFAESI. Once notified, the NBFC gains SARFAESI Act enforcement powers.

The SARFAESI Act is an essential tool for NBFCs dealing with secured lending. Being notified under SARFAESI can improve recovery efficiency, reduce NPAs, and enhance financial stability.

If your NBFC meets the eligibility criteria, taking proactive steps to apply for notification can be a game-changer in asset management and risk mitigation.