From Ambiguity to Authority: NBFCs and the Expanding Reach of SARFAESI 

Introduction 

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) was enacted to provide a robust legal framework for the recovery of non-performing assets (NPAs) and to empower secured creditors with mechanisms to enforce their security interests without the delays inherent in traditional court proceedings. By enabling faster and more efficient enforcement, the Act aimed to strengthen credit discipline and support financial stability. 

However, a key question soon emerged: could Non-Banking Financial Companies (NBFCs) which play a critical role in financing micro, small, and medium enterprises (MSMEs), often considered underserved sectors—avail themselves of the same enforcement powers under the SARFAESI Act? This inquiry has shaped significant judicial and policy developments, ultimately expanding the contours of creditor rights in India’s financial ecosystem. 

Understanding SARFAESI and NBFC 

In Section 13 of the SARFAESI Act, a secured creditor could take possession of a secured asset, use the secured asset, or sell the secured asset if a borrower defaulted. The aim of the Act was to add further efficiencies in the financial system by removing delays in recovering loans. NBFC are regulated lenders by the Reserve Bank of India (RBI) which play an important role in the lending of credit to sectors which banks do not serve and nonetheless they arguably provide the most important source of finance. However, due to the ambiguous nature of SARFAESI, and the way “financial institutions” was defined and interpreted in the Act, NBFCs have faced a variety of interpretations in applying the same security rights as banks.

Limited Access for NBFCs- Pre-2020 Framework 

Prior to February 24, 2020, the SARFAESI Act was mainly applicable to banks and designated financial institutions. NBFCs could only invoke the provisions of SARFAESI if they fulfilled two very stringent conditions of having an asset size of ₹500 crore or more and a minimum loan size per borrower of ₹1 crore. This gave rise to an impracticable regime that effectively excluded small and mid-sized NBFCs lending to MSMEs and retail borrowers. As a result, small NBFCs were effectively left to recover loans through long tedious court processes, defeating the purpose of efficient enforcement under SARFAESI.

Ruling of the 2020 Notification

In recognition of the difficulties of the previous framework, the government issued a notification on February 24, 2020, reducing the asset and loan thresholds. The asset threshold drops to ₹100 crore from ₹500 crore, and the minimum loan size drop to ₹50 lakh from ₹1 crore.³ This amended the framework for small and mid-tier NBFCs to also initiate collection measures from the SARFAESI Act recovery process. The impact was instant. They could immediately initiate collections without having to involve the courts, further enhancing their efficiency while decreasing time delays to collect debts and enhancing freer credit use. This had both NPA and lending flow implications for MSMEs.

The Notification of 2025: Increasing Reach and Oversight 

Additional modifications occurred via the Government of Canada’s February 28, 2025, notification. This information describes that the SARFAESI framework is now part of SEBI and RBI regulation. All of RBI-recognized NBFCs are designated as “qualified buyers” authorized to obtain secured assets based on the utilization of ARCs. The inclusion of SEBI guidelines enhances transparency and market discipline concerning propriety of asset recovery practices. This change also improved the recovery rate of distressed assets and strengthened investor confidence. However, certain ambiguities still persisted despite these progressive steps.  

Legislative Silences and Remaining Lacunae 

Although notifications have been issued, there are still some legislative gaps that have not been filled. A primary concern is the position of microfinance NBFCs. The 2025 notification did not make clear whether the activities of microfinance institutions those that mostly provide small unsecured loans of less than ₹50 lakh, fit within the purview of SARFAESI. Because usually microfinance NBFCs provide largely unsecured loans, uncertainty remains as to whether they will be able to enforce recovery against these loans under this law, creating risks around litigation and procedural dilemmas. 
 
Another issue is whether SARFAESI operates alongside IBC. Conflicts may arise if multiple creditors pursue recovery and have claims to the same asset. The 2025 announcement does not clarify whether NBFCs can pursue recovery under SARFAESI when the IBC is in progress. We still do not know if recovery can proceed during the IBC moratorium, or how creditors may cooperate in relation to their claims, even though these issues have implications for enforcement. 
 
A third issue emerges for loans that were made prior to 2025. The 2025 notification did not clarify whether the expanded SARFAESI powers for NBFCs can be applied retroactively for loans established prior to the issuance of the notification. Uncertainty in this area has the potential to create litigation, as borrowers would be able to challenge NBFCs enforcement of any loan executed prior to the date of the notification. 

Judicial Expansion: The M. Rajendran Case 

Judicial action has played an important role in interpreting SARFAESI, in circumstances concerning legislative silence. The Supreme Court’s judgment on 19 January 2025 in M. Rajendran v. KPK Oils and Proteins India Pvt. Ltd is a milestone judgment on various perplexities of procedure. The facts in issue concerned Section 13(8) of the Act on the exception of the borrower’s right to redeem secured property. The Court held that when an auction notice is issued, the borrower no longer has the right to redeem. The auction purchaser, once the sale certificate is granted, is the owner of the property, with indefeasibly of rights. The Court also stated that the 2016 amendment to Section 13(8) would only apply to defaults occurring after the amendment, creating consistency of enforcing rights. The Court ordered the Ministry of Finance and Ministry of Law & Justice to investigate and clarify any ambiguity to the legislative intention in the SARFAESI Act, more particularly to achieve uniformity with other jurisdictions. The judgment is an illustration of the judiciary’s progressive role in addressing the gaps, which many would argue, is a result of legislative inaction. 

Conclusion 

In conclusion, legislative amendments have made the SARFAESI Act more relevant in the NBFC space, but ambiguity persists. There are still important outstanding issues, including microfinance NBFCs, the extent to which IBC procedures interface with the SARFAESI Act and the treatment of prior loans.  The ruling in M. Rajendran illustrates how judicial interpretation can be a key driver for legal certainty in this emerging subject area, but legislative reform should go beyond case law and provide thoughtful direction by the legislature when considering the overall SARFAESI, IBC, SEBI and RBI framework. Clarity in these frameworks can aid in creating a valuable recovery mechanism for creditors, balance rights and promote trust within India’s financial system.