Banks Can Invoke SARFAESI for Loans Acquired From NBFCs Not Covered by Act at Origination: SC

New Delhi, Sep 3 (KNN) The Supreme Court on Wednesday held that banks can invoke the SARFAESI Act, 2002, to recover secured non-performing loans acquired from non-banking financial companies (NBFCs), even if the NBFCs were not covered under the Act when the loans were originally sanctioned.

A bench of Justices Sanjay Kumar and Sanjeev Sachdeva set aside a Bombay High Court judgment that had restricted Kotak Mahindra Bank from invoking the SARFAESI Act to recover loans assigned to it by City Financial Consumer Finance Ltd (CFCFL), an NBFC that was not a notified financial institution under Section 2(1)(m) of the Act when the loans were advanced.

Loan Acquires SARFAESI Status After Bank Assignment

The dispute involved three sets of mortgage-backed loan accounts originally extended by CFCFL between 2012 and 2013. Kotak Mahindra Bank subsequently acquired the accounts and invoked the SARFAESI Act for recovery.

CFCFL was notified as a financial institution under the Act only on August 27, 2018.

The borrowers argued that since the loans were created when CFCFL was outside the statutory definition of a financial institution under the Act, they could not subsequently become eligible for SARFAESI proceedings merely because they were assigned to a bank.

The Supreme Court rejected this contention and held that once a non-performing secured loan is acquired by a bank to which the SARFAESI Act applies, the loan immediately acquires the statutory attributes of a secured debt covered by the Act.

Court Rejects Borrowers’ Argument

The Court observed that accepting the borrowers’ argument would give borrowers who obtained loans from NBFCs outside the Act greater scope to default, as recovery would then have to proceed through ordinary civil remedies.

It held that the identity of the original lender does not prevent SARFAESI enforcement once a secured non-performing loan has been acquired by a bank covered by the Act.

The Court relied on its earlier decisions in M.D. Frozen Foods Exports Private Limited v. Hero Fincorp Limited (2017) and Indiabulls Housing Finance Limited v. Deccan Chronicle Holdings Limited (2018).

Allowing Kotak Mahindra Bank’s appeal, the Supreme Court directed restoration of the bank’s securitisation application before the Debt Recovery Tribunal (DRT).

(KNN Bureau)