In the Union budget 2015, the finance minister proposed that non-banking financial companies (NBFCs) registered with the Reserve Bank of India and having asset size of 500 crore and above, should be considered as “financial institution" under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act), 2002. This change has been made to bring parity in regulations governing NBFCs and other financial institutions in matters relating to recovery of loans.


This Act allows banks and financial institutions to auction assets allocated as security against a loan, when a borrower fails to repay her loans as stipulated in the loan agreement, without any intervention of court of law. This helps banks adopt measures for recovery or reconstruction and reduce their non-performing assets (NPAs). The Act also covers an individual who has taken a home loan to buy a property. According to the Act, if the borrower fails to repay her home loan, the lender can go for auction of the associated property (be it residential or commercial).

When you take a home loan to buy a house, you are supposed to pay back in the form of equated monthly instalments (EMIs). The instalments have to be paid for a fixed tenor and on a particular date of every month. Typically, a bank only charges a nominal late fee if you delay in payment of an EMI. But if you delay the subsequent EMI as well, the bank will send you an intimation reminding you about the payments. After three consecutive instances of non-payment of EMIs, the bank will send a demand notice, asking you to pay your dues along with the late fee as early as possible.

A demand notice is typically sent to the borrower as well as the guarantor. It calls upon them to pay their dues in full within 60 days from the date of the notice.

If even after repeated follow-ups and lapsation of notice period the borrower fails to pay the EMI, the lender declares the loan as an NPA, or a bad loan. After that, it takes possession of the property. Then it either sells or leases out the property, or assigns the right over the property to another entity to manage. After sale of asset, the lending institution keeps the outstanding dues and the remaining money, if any, is given to defaulting borrower.


This Act is only applicable where the outstanding dues are more than 20% of the principal and interest amount combined, or above 1 lakh. NPA should be backed by securities charged to the bank by way of hypothetication or mortgage or assignment.

Therefore, all borrowers should take care to repay their EMIs in time. If, for some reason, you are late in paying one instalment, do ensure that the subsequent ones are paid in time. Failure to do so can have dire consequences.