NBFCs seek lower Sarfaesi limit for debt resolution, better harmonisation

Non-banking financial companies are taken up the matter with the Reserve Bank of India and the ministry of finance, seeking the same threshold that banks and some other lenders enjoy

Non-banking financial companies (NBFCs) have sought a lowering of the threshold for debt recovery by NBFCs under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (Sarfaesi Act 2002) from ₹20 lakh to ₹1 lakh, and have taken the matter up with the Reserve Bank of India (RBI) and the ministry of finance.

 

As matters stand, the threshold for recourse under the Sarfaesi Act 2002 is at ₹1 lakh for banks, housing finance companies (HFCs), and asset reconstruction companies (ARCs), but the same for NBFCs is higher at ₹50 lakh.

 

The FY20 Union Budget had reduced the threshold to ₹50 lakh from ₹1 crore for banks, HFCs, ARCs and NBFCs, but the subsequent lowering of that limit to ₹20 lakh in FY21 left out NBFCs.

 

“What we have sought is a harmonisation in the threshold so that it helps recovery to smaller borrowers,” an executive with an NBFC said, on condition of anonymity.

 

The resolution time under Sarfaesi Act is 6-9 months versus three years under the debt recovery tribunals (DRTs). This puts an additional financial burden on NBFCs which is ultimately borne by borrowers as the rate of interest goes up.

 

According to the RBI’s Report on Trend and Progress of Banking in India FY25 (T&P:FY25), provisional data shows that 2,15,709 cases involving ₹1.03 trillion were referred to DRTs. Of this ₹32,466 crore was recovered, reflecting a recovery rate of 31.5 per cent. During the same period, 34,430 cases involving ₹1.29 trillion were referred to DRTs, of which a mere ₹12,363 crore was recovered, at a recovery rate of 9.5 per cent.

 

Resolution timelines under DRTs are also longer, sometimes going up to five years, which increases the number of stressed accounts on NBFCs' balance sheet, besides legal costs.

 

Another pain point is that the RBI on November 12, 2021, changed recognition of default to a daily basis from a monthly basis, irrespective of the loan size for banks, HFCs and NBFCs. But this harmonisation was not extended to the Sarfaesi threshold.

 

This, sources said, places NBFCs at a disadvantage compared to banks, since banks and HFCs can have recourse to the Sarfaesi Act for the same customers while NBFCs cannot. It also creates complications in co-lending – where banks and NBFCs share a loan exposure. Here a participating bank can invoke Sarfaesi for its share, but the partnering NBFC is not entitled to.

 

According to Transfer Pricing (T&P):FY25, the credit extended by NBFCs has been rising over the years, underscoring their growing importance in financial intermediation. It increased to 14.6 per cent of gross domestic product in FY25 from 13.5 per cent in FY24. During this period, NBFCs’ credit as a share of outstanding credit of banks increased to 25.3 per cent (23.6 per cent).

 

T&P:FY25 also found that emerging co-lending arrangements between banks and NBFCs have the potential to promote greater credit flow by NBFCs to underserved sectors like micro, small and medium enterprises, agriculture and retail borrowers.

Points to ponder

• Out in the cold: Sarfaesi reference threshold not reduced for NBFCs
• Better resolution under Sarfaesi: Provisional data shows recovery rate of 31.5 per cent vs 9.5 per cent under DRTs
• Key role of NBFCs: Credit extended by NBFCs grew to 14.6 per cent of gross domestic product in FY25 from 13.5 per cent in FY24. NBFCs’ credit as a share of outstanding credit of banks increased to 25.3 per cent from 23.6 per cent