Housing Finance Companies not NBFCs; can recover loans less than ₹20 lakh under SARFAESI: Madhya Pradesh High Court

The Madhya Pradesh High Court has ruled that the ₹20 lakh minimum threshold for loan recovery by Non-Banking Financial Companies (NBFCs) under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARAFAESI Act) is not applicable to Housing Finance Companies (HFCs) [Virendra Rathore and ors. v. Tehsildar Distt. Mandsaur (Madhya Pradesh) SRG Housing Finance Limited and ors]..In other words, the Court held that HFCs are allowed to invoke the SARFAESI Act to recover loans, even if the loan amount is below the ₹20 lakh minimum cap that is applicable to NBFCs. "The HFIs / HFCs being a special genre of FIs / companies, created and regulated by special enactment of NHB Act, the same cannot be compartmentalised in the bogie of NBFCs, moreso when NHB Act does not u/s 29-A postulate the applicability of Chapter III-B r/w Section 45(I)(f) of the RBI Act. Therefore HFIs/ HFCs .... cannot impliedly be deemed to have been included under the umbrella of NBFC’s, till and until such an intention is express and explicit under the NHB Act or the notifications issued under it. For this reason, therefore the minimum pecuniary threshold of 20 Lakhs shall not apply to HFIs/ HFCs ... as prescribed in case of the NBFCs," the Court's May 22 judgment said. A Bench of Justices SA Dharmadhikari and Ganjendra Singh passed the ruling while dismissing a petition challenging an HFC's decision to invoke the SARFAESI Act to recover a loan of ₹8 lakh. .The Court was faced with two important issues. First, whether an HFC can avail the SARFAESI Act to recovering outstanding dues that was less than ₹20 lakhs; and second, whether the writ petition in this matter was maintainable, as according to the SARFAESI Act, the jurisdiction in such disputes lay with the Debts Recovery Tribunal (DRT). The Court held that the petition was maintainable before the High Court since it raised an important question of of law.It then moved on to decide the issue of whether the SARFAESI Act could have been invoked by the HFC in a case where the loan amount was less than ₹20 lakh.Notably, a notification issued by the Central government in 2021 clarified that NBFCs can only invoke the SARFAESI Act to recover loans, if the loan amount was equal to or higher than ₹20 lakh. .The petitioners (debtors), in this case, had argued that an HFC was a type of NBFC. Therefore, it was argued that the ₹20 lakh threshold applicable to NBFCs was also applicable to HFCs. Consequently, it was contended that the HFC, in this case, could not invoke the SARFAESI Act to recover a ₹8 lakh loan. On the other hand, the respondent-HFC contended that HFCs fall under the category of financial institutions (FI) and are not NBFCs as defined under the Reserve Bank of India (RBI) Act. The respondent added that the HFCs are regulated by a special law, the National Housing Bank Act, 1987 (NHB Act). Therefore, it was contended that the ₹20 lakh minimum cap applicable to NBFCs under the SARFAESI Act is not applicable to HFCs. .After perusing the provisions of the RBI Act, the NHB Act and the SARFAESI Act, the Court agreed with the respondent's stance that HFCs are not NBFCs."The HFI/ HFC shall fall under the phrase ‘any other institution’ occurring under Section 2 (1)(m)(iv) of the SARFAESI Act and not as a sub-species of NBFC under Section 45 (I) of the RBI Act," the Court explained. The Court further observed that the Central government has issued different sets of notifications from time to time on aspects concerning the applicability of SARFAESI - one for NBFCs and another specifically for HFCs. This also indicated that the minimum cap applicable to NBFCs under the SARFAESI Act would not apply to HFCs, the Court reasoned. .The Court went on to observe that HFCs are a special kind of companies regulated by the NHB Act and the same cannot be compartmentalized with NBFCs. The pecuniary threshold prescribed for NBFCs will not apply to HFCs/ Housing Financial Institutions (HFIs), the Court concluded..It, therefore, held that the respondent-HFC in this case was allowed to invoke the SARFAESI Act to recover a loan worth less than ₹20 lakhs from the petitioner.If the petitioners are unhappy with actions taken under the SARFAESI Act, they can file an application with the DRT on other grounds, but not on the issue decided in this petition, the Court added.With these observations, the Court dismissed the petition..Advocate Kushagra Jain appeared for the petitioners. Advocate Rohit Saboo appeared for a private respondent. .[Read Judgment]