According to the Court, HFCs are distinct financial entities for purposes of the NHB Act.

Thus, HFCs will not be subject to the SARFAESI Act's minimum cap of ₹20 lakhs for loan recovery by NBFCs.

In Virendra Rathore and others v. Tehsildar Distt. Mandsaur (Madhya Pradesh) SRG Housing Finance Limited and others, the Madhya Pradesh High Court held that the ₹20 lakh minimum threshold for loan recovery by Non-Banking Financial Companies (NBFCs) under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARAFAESI Act) does not apply to HFCs.

Stated differently, the Court decided that HFCs could use the SARFAESI Act to get loans, even if the loan balance was less than the ₹20 lakh minimum cap that NBFCs are subject to.

"As a unique type of financial institution established and governed by the NHB Act, HFIs and HFCs cannot be divided into the NBFC category, especially as the NHB Act does not u/s 29-A postulate the applicability of Chapter III-B in accordance with Section 45(I)(f) of the RBI Act.

Therefore, until and unless such an aim is expressly and explicitly stated within the NHB Act or the notifications made under it, HFIs and HFCs... cannot be implicitly presumed to have been placed under the purview of NBFCs.

Because of this, HFIs and HFCs should not be subject to the minimum financial threshold of 20 lakhs, as stipulated in the case of NBFCs, the Court ruled in its May 22 ruling.

The verdict was made by a bench consisting of Justices SA Dharmadhikari and Ganjendra Singh, who also dismissed a petition that contested an HFC's use of the SARFAESI Act to recoup a ₹8 lakh loan.

The Court had to decide on two crucial matters. The first question was whether an HFC may use the SARFAESI Act to recover unpaid debts under ₹20 lakhs; the second was whether the writ petition in this case could be maintained, since the Debts Recovery Tribunal (DRT) had jurisdiction over such issues under the SARFAESI Act.

The Court determined that because the petition brought up a significant legal issue, it might be maintained before the High Court.

It then proceeded to examine whether the HFC could have used the SARFAESI Act in a situation where the loan amount was less than ₹20 lakh.

Notably, the Central government made it clear in a notification from 2021 that NBFCs may only use the SARFAESI Act to collect loans if the loan amount was ₹20 lakh or above.

In this instance, the petitioners (debtors) contended that an HFC was a particular kind of NBFC. As a result, it was claimed that HFCs were subject to the same ₹20 lakh barrier as applied to NBFCs. As a result, it was argued that the HFC was not entitled to use the SARFAESI Act in this particular case in order to retrieve a debt of ₹8 lakh.

Conversely, the respondent, an HFC, argued that HFCs are not NBFCs as defined by the Reserve Bank of India (RBI) Act, but rather fell under the category of financial institutions (FI). The respondent further stated that the National Housing Bank Act of 1987 (NHB Act) is the unique law that regulates HFCs. As a result, it was argued that HFCs are not subject to the ₹20 lakh minimum cap that NBFCs are under the SARFAESI Act.

The Court concurred with the respondent's position that HFCs are not NBFCs after reviewing the provisions of the RBI Act, the NHB Act, and the SARFAESI Act.

"The HFI/ HFC shall fall under the phrase ‘any other institution’ occurring under Section 2 (1)(m)(iv) of the SARFAESI Act and not as a sub-species of NBFC under Section 45 (I) of the RBI Act," the Court stated.

The Court further noted that the Central government has periodically released two sets of notifications, one for NBFCs and the other expressly for HFCs, on various topics pertaining to the applicability of SARFAESI.

The Court reasoned that this also suggested that HFCs would not be subject to the minimal cap set forth in the SARFAESI Act for NBFCs.

The Court continued by noting that HFCs and NBFCs are two distinct categories of businesses that are subject to different regulations under the NHB Act.

The Court came to the conclusion that HFCs and Housing Financial Institutions (HFIs) would not be subject to the financial criterion set forth for NBFCs.

As a result, it decided that the respondent, HFC, in this instance could use the SARFAESI Act to get back from the petitioner a loan that was not more than ₹20 lakhs.

If the petitioners are unhappy with actions taken under the SARFAESI Act, they can file an application with the DRT on other grounds, but not on the issue decided in this petition, the Court added.

With these observations, the Court dismissed the petition.