The Supreme Court has ruled that banks can use the SARFAESI Act to recover non-performing loans acquired from non-banking financial companies, even if the original loans predate the lenders’ coverage under the law, marking a significant shift in enforcement practices.
The Supreme Court on Wednesday ruled that banks may use the SARFAESI Act, 2002, to recover secured bad loans acquired from non-banking financial companies even when those lenders were not covered by the law when the loans were first made. The decision gives lenders broader access to the Act’s faster enforcement route after assignment of the debt.
A bench of Sanjay Kumar and Sanjeev Sachdeva overturned a Bombay High Court ruling that had stopped Kotak Mahindra Bank from proceeding under SARFAESI over loan accounts it had bought from City Financial Consumer Finance Ltd, or CFCFL. According to the court record, the loans were created in 2012 and 2013, while CFCFL was notified as a financial institution under the Act only on August 27, 2018.
The borrowers argued that a loan could not later gain SARFAESI protection simply because it was transferred to a bank. The Supreme Court rejected that view, saying that once a non-performing secured loan is acquired by a bank already covered by the Act, the debt takes on the character of a secured debt under SARFAESI. In effect, the identity of the original lender does not block enforcement once the assignee is a qualifying institution.
The bench relied on earlier rulings in M.D. Frozen Foods Exports Private Limited v. Hero Fincorp Limited and Indiabulls Housing Finance Limited v. Deccan Chronicle Holdings Limited. Those cases had recognised that a successor in interest may invoke the Act when the claim is still live and owing, a principle the court said also applies when a bank acquires a stressed secured loan from an entity outside SARFAESI’s original scope. The court restored Kotak Mahindra Bank’s application before the Debt Recovery Tribunal.
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