Money & Banking

Loan recovery: Ministry gives more power in the hands of NBFCs

K.R.Srivats New Delhi | Updated on February 13, 2021

The impact was higher on NBFCs since they were unable to function during the initial phase of lockdown   -  mediaphotos

NBFCs allowed to use SARFAESI law for minimum loan size of Rs 20 lakh

The Finance Ministry has operationalised a budget announcement that lowered the minimum loan size eligible for debt recovery by NBFCs under the SARFAESI law to ₹ 20 lakhs from the existing level of ₹ 50 lakhs.

This move could come in handy for large non-banking finance companies (NBFCs) with a minimum asset size of ₹ 100 crore for making loan recovery under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002.

Such NBFCs can now take recourse to SARFAESI law for loan sizes at minimum ₹ 20 lakhs or more, implying that home loans to lower to middle-income groups as well as loans extended as Loans against Property (LAP) for small and medium businesses would also get covered for recovery using this route is case of defaults, said industry observers.

SARFAESI empowers banks and financial institutions to attach pledged assets of the borrower in the event of non-payment of dues by the borrower.

It may be recalled that late former Finance Minister Arun Jaitley had in the 2015-16 Budget announced that certain NBFCs would be allowed to use SARFAESI to make recoveries of defaulted loans.

Starting then with NBFCs having asset size of ₹ 500 crore and above and for loan sizes of ₹ 1 crore and above, the government had year-after-year been lowering the threshold. Now in the latest budget, this facility has been given for loan sizes of ₹ 20 lakh and above from a level of ₹ 50 lakh prescribed in last year’s Budget.

Reacting to the latest move of the Department of Financial Services in the Finance Ministry, Raman Aggarwal, Co-Chairman, Finance Industry Development Council (FIDC) told BusinessLine that such threshold has been there only for NBFCs and not banks. NBFCs should be allowed to enforce security through SARFAESI for any loan amount.

“We welcome this step. But FIDC has been representing for some time that there should not be any limit or threshold. Even the U.K.Sinha Committee on MSMEs had recommended that there should not be any thresholds. It goes against MSME lending as such lending is usually small ticket sized lending”, he said.

Srinath Sridharan, Independent markets commentator, said: “It is common place to find SME/MSME borrowers using the route of Loan Against Property (LAP) to fund their businesses. In that light, this reduced threshold amount of ₹ 20 lakh for initiating SARFAESI proceedings could hurt genuine business borrowers who have used LAP for lack of other SME funding.

Seen with the lens where the threshold for SME defaults to be taken under IBC proceedings was moved to ₹1 crore, this quantum need to be relooked, in toto along with the IBC threshold”.

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Published on February 13, 2021
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