Central Notification Prohibits NBFC from certain actions

NBFC stands for “Non-Banking Financial Company.” It is a type of financial institution that provides a wide range of banking services, similar to traditional banks, but without holding a banking license. NBFCs are regulated by the Reserve Bank of India (RBI) in India, or by the relevant financial regulatory authorities in other countries. The primary activities of NBFCs include providing loans and advances, investments in various financial products, asset financing, and other financial services. They cater to different sectors and often specialize in specific niches such as consumer loans, housing finance, microfinance, leasing, and more.

While NBFCs can engage in many banking activities, they are not allowed to accept demand deposits like banks. Demand deposits are funds deposited by customers that can be withdrawn at any time without any prior notice.

NBFCs play a vital role in the financial system, especially in providing credit to sectors that might not be adequately served by traditional banks. However, due to their non-banking nature, they are subject to different regulations and requirements compared to banks. These regulations are in place to ensure financial stability, consumer protection, and the smooth functioning of the overall financial system.

How to recover the loan NBFC-

Non-Banking Financial Companies (NBFCs) can follow a systematic process to recover the loan amount from a defaulter. The process typically involves the following steps:

1. Communication: The first step is to initiate communication with the borrower as soon as the default occurs. The NBFC should send reminders and notices to the borrower about the missed payment and request immediate repayment.
2. Legal Notice: If the borrower does not respond to the initial communication or fails to make the payment, the NBFC can issue a legal notice to the defaulter. The legal notice will state the outstanding amount, the consequences of continued default, and the intention to initiate recovery proceedings if the payment is not made within a specified period.
3. Negotiation and Settlement: In some cases, borrowers may be facing temporary financial difficulties, and negotiation for a settlement or a revised repayment plan could be considered. This option can be explored to arrive at an agreement that is acceptable to both parties.
4. Recovery Agents: If the borrower still does not cooperate, the NBFC may engage the services of recovery agents who act on behalf of the NBFC to recover the outstanding dues. It is essential to ensure that the recovery agents adhere to the legal guidelines and not use any abusive or coercive methods.
5. SARFAESI Act: As a last resort, if the loan is secured by collateral (assets like property, vehicles, etc.), the NBFC can invoke the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act. This allows the NBFC to take possession of the collateral and sell it to recover the outstanding amount without the intervention of the court.
6. Legal Proceedings: If the recovery efforts are not successful, the NBFC may initiate legal proceedings against the defaulter. This can involve filing a recovery suit in a court of law or using other legal remedies available under the applicable laws.

It’s essential for NBFCs to follow the legal and regulatory framework while attempting to recover the loan amount. Engaging in unfair practices or harassment of borrowers is strictly prohibited and can result in severe consequences for the NBFC.

Notification of central Government for NBFC –

The notification issued by the Central Government is related to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The notification specifies certain Non-Banking Financial Companies (NBFCs) as “financial institutions” under the SARFAESI Act.
Here’s a breakdown of the key points:
1. The notification is issued under a specific provision of the SARFAESI Act, namely sub-clause (iv) of clause (m) of subsection (1) of section 2.
2. The previous notifications issued by the Government on 5th August 2016, 27th August 2018, and 24th October 2018 are being replaced by this new notification.
3. The Central Government is specifying certain NBFCs (non-banking financial companies) that meet the criteria of having assets worth rupees one hundred crore and above.
4. These specified NBFCs will be treated as “financial institutions” under the SARFAESI Act.
5. As a result, these NBFCs will have the power to enforce security interest in secured debts of rupees fifty lakh and above. This means they can take action to recover dues from borrowers who have secured their loans with assets worth fifty lakh rupees or more.

Amendment in the Notification of Central Government –

The Central Government has made changes to a notification related to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The amendment modifies the minimum threshold amount mentioned in the previous notification.

The earlier notification stated that the Act applied to cases involving financial assets of “rupees fifty lakh and above.” However, with the recent amendment, the minimum threshold amount has been reduced, and the Act will now apply to cases involving financial assets of “rupees twenty lakh and above.”

Non-Banking Finance Companies (NBFCs) are disregarding the central government’s notification. –

It is essential for Non-Banking Financial Companies (NBFCs) to adhere to the notifications and regulations set forth by the Central Government. However, some instances have been reported where NBFCs have utilized the SARFASSI Act for the recovery of loans, even when the loan amount is below the specified threshold of 20 lakhs.

While NBFCs do have the right to recover their loan amount from borrowers, it should be done in accordance with the law. If a borrower receives a notice from an NBFC for loan recovery, it is crucial to carefully examine the demand notice. If the notice is issued under the SARFASSI Act, and the loan amount is below 20 lakhs, the borrower should take prompt action and respond to the NBFC.

By filing a timely reply to the NBFC, the borrower can assert their rights and ensure that the recovery process follows the appropriate legal procedures. Staying informed about the relevant laws and regulations and seeking legal advice, if necessary, can be beneficial for borrowers facing such situations. It is important to protect one’s rights and adhere to the provisions set by the regulatory authorities to ensure fair and lawful practices in loan recovery processes.

Conclusion –

 When the loan amount is less than 20 lakhs, Non-Banking Financial Companies (NBFCs) are not permitted to initiate proceedings under the SARFASSI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act). This means that if a borrower has taken a loan from an NBFC, and the outstanding loan amount is below 20 lakhs, the NBFC cannot use the provisions of the SARFASSI Act to initiate any recovery proceedings against the borrower.

The SARFASSI Act is primarily applicable to loans exceeding the specified threshold amount, and it provides the framework for NBFCs to take possession of and sell the assets of defaulting borrowers to recover their dues. However, for loans below the 20 lakhs threshold, the NBFC must follow other legal procedures and recourse mechanisms to recover the loan amount. These procedures might include sending reminders, issuing legal notices, or taking the matter to civil courts if necessary.

It is crucial for borrowers to be aware of their rights and the applicable laws governing loan recovery. If they receive any notice from an NBFC claiming recovery under the SARFASSI Act for a loan below 20 lakhs, they should seek legal advice and challenge the proceedings accordingly, as it would not be legally permissible for the NBFC to use SARFASSI provisions in such case