The SARFAESI Act, 2002 grants powerful recovery rights to lenders, allowing them to enforce security interests without approaching civil courts. However, not every lender can invoke SARFAESI. The Act applies only to specified categories of secured creditors and only in accordance with statutory and regulatory conditions.

This article explains who is legally entitled to use the SARFAESI Act and who is excluded from its ambit.

Meaning of “Secured Creditor” Under SARFAESI

The SARFAESI Act can be invoked only by a “secured creditor”, meaning a lender in whose favour a security interest has been created over the borrower’s assets.

A secured creditor may include:

• Banks

• Financial institutions

• Asset Reconstruction Companies (ARCs)

• Certain notified NBFCs

1. Banks – Primary Users of SARFAESI

Scheduled Banks

All scheduled banks are fully empowered to invoke SARFAESI, including:

• Public Sector Banks

• Private Sector Banks

• Foreign Banks operating in India

Banks form the largest and most frequent users of SARFAESI proceedings.

Co-operative Banks

Co-operative banks can invoke SARFAESI only if they fall within the statutory definition and are covered by relevant notifications and judicial interpretations.

⚠️ Borrowers often challenge SARFAESI proceedings initiated by co-operative banks on jurisdictional grounds.

2. Financial Institutions Under SARFAESI

The term “financial institution” includes:

• Public Financial Institutions notified by the Central Government

• Institutions specified under banking laws

Examples include:

• National financial institutions

• Development finance institutions

• Government-notified entities engaged in lending activities

Such institutions can invoke SARFAESI only for secured loans.

3. NBFCs – Conditional Application of SARFAESI

Unlike banks, NBFCs cannot automatically invoke SARFAESI.

When Can NBFCs Use SARFAESI?

NBFCs can invoke SARFAESI only if:

• They are specifically notified by the Central Government, and

• The secured debt satisfies the minimum monetary threshold prescribed by notification

If an NBFC is not notified, SARFAESI proceedings initiated by it are illegal and void.

4. Asset Reconstruction Companies (ARCs)

ARCs registered under the Act can:

• Acquire NPAs from banks or financial institutions

• Step into the shoes of the original lender

• Invoke SARFAESI for enforcement of security interests

ARCs enjoy full SARFAESI powers once the asset is legally acquired.

Who Cannot Use the SARFAESI Act?

The following entities cannot invoke SARFAESI:

• Private money lenders

• Unregistered finance companies

• Individuals

• Partnership firms (as lenders)

• Creditors without security interest

• Creditors holding unsecured loans

Loan & Asset-Based Restrictions

Even eligible lenders cannot use SARFAESI in certain situations:

• Unsecured loans

• Agricultural land

• Assets exempt under law

• Cases where the debt amount is below the statutory threshold

Importance of Eligibility Under SARFAESI

Eligibility is jurisdictional. If a lender:

• Is not authorised under the Act, or

• Fails to satisfy notification requirements

Then entire SARFAESI proceedings can be set aside by the Debt Recovery Tribunal.

Borrower’s Right to Challenge Unauthorized SARFAESI Action

Borrowers can challenge SARFAESI action on grounds that:

• The lender is not a “secured creditor”

• NBFC is not notified

• Loan is unsecured

• Asset is exempt

Such challenges are maintainable before the Debt Recovery Tribunal under Section 17.

Practical Guidance for Borrowers

• Verify whether the lender is authorised under SARFAESI

• Check if NBFC is notified

• Examine nature of security

• Challenge jurisdictional defects at the earliest stage

Early legal scrutiny often results in complete quashing of proceedings.

Conclusion

The SARFAESI Act is a special recovery statute, available only to specified secured creditors. While banks and notified financial institutions enjoy broad powers, NBFCs can invoke SARFAESI only if expressly notified. Borrowers must remember that unauthorised SARFAESI action is illegal, regardless of default.

FAQs

Q. Can all NBFCs invoke SARFAESI Act?

No. Only NBFCs notified by the Central Government can invoke SARFAESI.

Q. Can SARFAESI be invoked by private lenders?

No. Private lenders are outside the scope of the Act.

Q. Can SARFAESI be invoked for unsecured loans?

No. Security interest is mandatory.