Recovery Proceedings Under SARFAESI Act Applicable to Housing Finance Companies

In a decision delivered by the High Court of Madhya Pradesh on May 22, 2024, in the case of Virendra Rathore v. Tehsildar Distt. Mandsaur [W.P. No. 3745 of 2024] it was held that since a housing finance company is a separate financial institution under the National Housing Bank Act, 1987 (NHB Act), it can resort to debt recovery proceedings under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002 (SARFAESI Act), regardless of whether the loan amount crosses the applicable threshold of Rs. 20 Lakhs for Non-Banking Financial Companies (NBFCs).

In the present case, the petitioner borrowed a secured loan of Rs. 8 Lakhs from the respondent who was a housing finance company. The petitioner mortgaged his property as a collateral in lieu of this loan. Upon default in repayment of the amount, the loan was classified as a non-performing asset and proceedings under Section 13 of the SARFAESI Act were initiated.

The issue for consideration in this case was whether the respondent, being a housing finance company, was justified in resorting to provisions of the SARFAESI Act for recovery of the loan which was lower than the monetary threshold of Rs. 20 Lakhs fixed by the Central Government (Ministry of Finance) for NBFCs. The rationale of the petitioner in bringing up this issue before the court was in reference to a gazette notification dated February 12, 2021, and various other circulars of the Reserve Bank of India (RBI) wherein housing finance companies were seen as one of the sub-species of the larger category of NBFCs.

Hearing the contentions advanced by both parties, the court opined that the objective of the SARFAESI Act was the facilitation of quick recovery of loans and therefore, its provisions had to be interpreted in a broad manner to achieve this goal. Further, regarding invocation of the SARFAESI Act for amounts below Rs. 20 lakhs, the court noted that while provisions of Chapter III-B of the Reserve Bank of India Act, 1934 (RBI Act) broadly covers financial institutions including those engaged in housing finance, housing finance companies created under the National Housing Bank Act, 1987 (NHB Act) are regulated by a specific framework under Section 29-A.

Further, the court held that housing finance companies do not automatically fall under the general provisions of the RBI Act applicable to NBFCs, rather they are classified as financial institutions under the SARFAESI Act through distinct notifications. Moreover, they are categorized as financial institutions only because they fall under the phrase “any other institution” in Section 2(1)(m)(iv) of the SARFAESI Act and therefore, notifications pertaining to NBFCs do not apply to housing finance companies and consequently the monetary threshold of Rs.20 lakhs would not be applicable.