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 (SARFAESI Act), does not apply to Housing Finance Companies (HFCs) [Virendra Rathore and ors. v. Tehsildar Distt. Mandsaur (Madhya Pradesh) SRG Housing Finance Limited and ors].
In essence, the Court held that HFCs are permitted to invoke the SARFAESI Act to recover loans, even if the loan amount is below the ₹20 lakh minimum threshold applicable to NBFCs.
“The HFIs/HFCs, being a special genre of FIs/companies created and regulated by the NHB Act, cannot be classified under NBFCs, especially since the NHB Act does not mandate the applicability of Chapter III-B read with Section 45(I)(f) of the RBI Act. Therefore, HFIs/HFCs cannot be deemed to be included under the umbrella of NBFCs unless explicitly stated in the NHB Act or related notifications. Consequently, the ₹20 lakh minimum threshold shall not apply to HFIs/HFCs as it does to NBFCs,” the Court’s May 22 judgment stated.
A Bench of Justices SA Dharmadhikari and Ganjendra Singh delivered 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 faced two key issues: whether an HFC can use the SARFAESI Act to recover outstanding dues of less than ₹20 lakh, and whether the writ petition was maintainable, given that such disputes typically fall under the jurisdiction of the Debts Recovery Tribunal (DRT) as per the SARFAESI Act.
The Court held that the petition was maintainable before the High Court since it raised an important question of law.
It then addressed whether the SARFAESI Act could be invoked by an HFC in cases where the loan amount was less than ₹20 lakh.
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 is equal to or exceeds ₹20 lakh. The petitioners argued that HFCs, being a type of NBFC, should also be subject to this threshold and, therefore, could not use the SARFAESI Act to recover a loan of ₹8 lakh.
However, the respondent-HFC argued that HFCs are classified as financial institutions (FI) and not NBFCs under the Reserve Bank of India (RBI) Act. They added that HFCs are regulated by a special law, the National Housing Bank Act, 1987 (NHB Act), and hence, the ₹20 lakh threshold for NBFCs does not apply to HFCs.
After examining the provisions of the RBI Act, NHB Act, and SARFAESI Act, the Court agreed with the respondent’s stance that HFCs are not NBFCs.
“The HFI/HFC falls under the category of ‘any other institution’ under Section 2(1)(m)(iv) of the SARFAESI Act and not as a subtype of NBFC under Section 45(I) of the RBI Act,” the Court explained.
The Court noted that the Central government has issued distinct notifications regarding the applicability of SARFAESI, one set for NBFCs and another specifically for HFCs, indicating that the ₹20 lakh minimum threshold for NBFCs does not apply to HFCs.
The Court concluded that HFCs are a special type of company regulated by the NHB Act and cannot be grouped with NBFCs. The pecuniary threshold for NBFCs does not apply to HFCs/Housing Financial Institutions (HFIs).
Therefore, the Court held that the respondent-HFC in this case was allowed to invoke the SARFAESI Act to recover a loan worth less than ₹20 lakh from the petitioner.
If the petitioners are dissatisfied with actions taken under the SARFAESI Act, they may 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 represented the petitioners, while Advocate Rohit Saboo appeared for the private respondent.
