Finance minister Nirmala Sitharaman has proposed to decrease the threshold for non-banking monetary providers (NBFCs) to initiate recovery proceedings against loan defaulters below the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. In her Budget speech, the FM proposed to decrease 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 mentioned.
Veena Sivaramakrishnan, companion, Shardul Amarchand Mangaldas, mentioned decreasing the quantity for taking SARFAESI action will provide lenders much better access to speedy track and out of court enforcement mechanism, which would lead to much better discipline in the financing planet. “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 companion at KS Legal and Associates, mentioned relaxation in threshold for NBFCs below SARFAESI is probably to strengthen monetary well being of lenders and simultaneously increase credit discipline even though 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 mentioned.
FE discovered that NBFCs had earlier requested the finance minister to minimize threshold limits for initiating recovery proceedings. In the absence of decrease threshold limits, NBFCs had to file situations at civil courts for recovery. The recovery below SARFAESI is applicable only to secured loans. Under the SARFAESI Act, a lender can take possession of the home or mortgaged assets soon after a 60-day notice. The Act is applicable to dwelling loans, loan against home and loan against collateral for micro modest medium enterprises (MSMEs).