NBFCs under SARFAESI: Applicability and the Thresholds

Banks were always within SARFAESI; non-banking financial companies were not. An NBFC comes within the Act only when the Central Government notifies it, and even then only above certain thresholds of size and loan amount. Those thresholds have been lowered over the years, steadily widening access. This note sets out how NBFCs come in, the thresholds and their progressive lowering, and the effect on which NBFCs and which loans the Act reaches.

1. How NBFCs Come Within the Act

Figure 1: In by notification, not automatically

• The notification route. An NBFC is not automatically within the Act: the Central Government must notify it, bringing it in as a financial institution and secured creditor.
• Becomes a secured creditor. Once notified and above the thresholds, the NBFC may use the s.13 enforcement machinery like a bank (Topics 10, 22)
• Only for secured debts. The NBFC enforces only a secured debt backed by a security interest, within the s.31 limits that apply to all creditors (Topic 5)
• Subject to the floor. Access is confined to NBFCs above an asset size, and to secured debts above a minimum amount, both set by notification.

2. The Thresholds and Their Lowering

Figure 2: Steadily widening access

• 2016, the first notification. An NBFC with assets of Rs 500 crore and above could enforce a secured debt of Rs 1 crore and above, a high bar reaching only the largest NBFCs.
• 2020. Lowered to assets of Rs 100 crore and above and a secured debt of Rs 50 lakh and above, opening the Act to many more NBFCs.
• 2021, the current position. Lowered again to assets of Rs 100 crore and above and a secured debt of Rs 20 lakh and above, the figure in force now.
• Check the latest notification. Because the figures move by notification, the current notification governs, and a question should be answered on the latest limits.

3. The Effect on Access

Figure 3: Wider, but still gated

• Progressively widened. Each notification lowered the bar, letting more NBFCs and smaller loans into the Act, in response to the sector's demand for faster recovery.
• Still only above the floor. An NBFC below the asset size, or a secured debt below the minimum, remains outside the Act and must use the ordinary remedies.
• A policy balance. The thresholds balance giving NBFCs an effective recovery tool against keeping small lenders and small loans out of a coercive remedy.
• Within the general limits. Even a qualifying NBFC is bound by the same conditions and exclusions as any secured creditor, including NPA classification and the s.31 bars (Topics 23, 5)

4. Frequently Asked Questions

Can a non-banking financial company use the SARFAESI Act to recover its dues?

Yes, but only if it has been notified by the Central Government and meets the prescribed thresholds. An NBFC is not automatically within the SARFAESI Act; it comes in as a financial institution and secured creditor by notification, after which it may use the Section 13 enforcement machinery like a bank. Access is confined to NBFCs above a specified asset size and to secured debts above a minimum amount, and the NBFC enforces only a secured debt backed by a security interest, within the Section 31 limits and after the account is validly classified a non-performing asset. A smaller NBFC, or a loan below the minimum, falls outside the Act and must use the ordinary remedies.

What are the current thresholds for an NBFC to invoke SARFAESI?

Under the notification currently in force, from 2021, an NBFC with assets of Rs 100 crore and above may enforce a security interest under the SARFAESI Act where the secured debt is Rs 20 lakh and above. These thresholds were lowered progressively: the first notification in 2016 set them at assets of Rs 500 crore and a secured debt of Rs 1 crore; the 2020 notification lowered them to assets of Rs 100 crore and a secured debt of Rs 50 lakh; and the 2021 notification brought the debt threshold down to Rs 20 lakh. Because the figures are set by notification and have been revised over time, the current notification should always be checked, as the limits may change again.

5. Related Topics

• Topic 10: Secured Creditor and Secured Asset. Who qualifies to invoke the Act.
• Topic 5: Section 31 Exclusions. The limits that bind every secured creditor.