Can NBFC initiate proceeding under the SARFAESI: What are the requirements for a Non-Banking Financial Company (NBFC) to initiate proceedings under the SARFAESI Act, and what role does the Reserve Bank of India (RBI) play in regulating this process?
Asked from: Uttar Pradesh
To initiate proceedings under the SARFAESI Act, a Non-Banking Financial Company (NBFC) must meet specific criteria established by the Reserve Bank of India (RBI). These criteria ensure that only financially sound and compliant NBFCs can enforce security interests under the Act. The NBFC must be registered with the RBI and classified as either a Systemically Important Non-Deposit Taking NBFC (NBFC-ND-SI) or a Deposit-Taking NBFC (NBFC-D).
As per the RBI’s notification dated January 1, 2020, the NBFC must have a total asset size of ₹500 crore or more. A valid security interest (charge), such as a mortgage, hypothecation, or pledge, over the borrower’s assets is required, giving the NBFC a legally enforceable claim over the collateral. Furthermore, the NBFC must comply with all applicable RBI regulations, including accurate and timely asset classification (properly classifying assets as performing or non-performing), maintaining adequate provisions for bad debts, and adhering to other prudential norms, reporting standards, and governance guidelines.
The RBI plays a pivotal role in this process, overseeing NBFCs to ensure compliance with the SARFAESI Act and other financial regulations, including monitoring their financial health, governance, and recovery practices. The RBI issues guidelines and notifications to clarify eligibility and operational frameworks, and it monitors NBFCs to prevent misuse of SARFAESI provisions, ensuring recovery practices are fair, transparent, and legally compliant, and avoiding coercive or unethical practices. While facilitating debt recovery, the RBI also safeguards borrower interests by ensuring NBFCs follow due process and do not resort to unfair practices.
In summary, only eligible NBFCs meeting RBI criteria (registration, asset size, valid security interest, and regulatory compliance) can initiate SARFAESI proceedings. The RBI plays a vital role in regulating and supervising this process to ensure effective debt recovery while protecting borrower rights and maintaining financial stability.
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