Chennai, March 9 : The central government's move to extend the applicability of the SARFAESI Act to non-banking finance companies (NBFC) would speed up recoveries by these firms, according to Moody's Investors Service.
Expressing similar views, industry officials told IANS that the government has now agreed to the sector's long pending demand.
Union Finance Minister Arun Jaitley, presenting the budget for 2015-16, proposed to designate NBFCs with asset base over Rs.5 billion as 'financial institutions' under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act).
According to an article in the latest issue of `Moody's Credit Outlook', the government's move is a "credit positive" for lenders of loans against borrower properties - residential and commercial.
"The NBFC industry as well as Sundaram Finance Ltd has been demanding this for the past 10 years. This is part of the harmonisation of regulations and it is a welcome measure," T.T. Srinivasaraghavan, managing director, Sundaram Finance, told IANS here on Monday.
"The move is for protecting public funds. The government's decision gives NBFCs a better platform to enforce their rights," he added.
According to him, the government's move in a way equates NBFCs with the banks.
Residential mortgage-backed securities (RMBS) backed by loan against property (LAP) originated by these NBFCs would also benefit from speedier loan recovery, Moody's report notes.
"The SARFAESI Act would expedite NBFCs' repossession of the underlying property backing the LAP because NBFCs would have the ability to demand repayment of any defaulted loan within 60 days after the lender classifies such loans as non-performing assets (NPAs)," the article notes.
If the defaulted borrower refuses to repay the outstanding loan in full within 60 days of notice, lenders would be allowed to seek repossession through the chief metropolitan magistrate or district magistrates in the jurisdictions in which the properties are located.
Under current practices, NBFCs must resort to civil court proceedings to recover their loans and take repossession of a property whose recovery time is difficult to determine.
Repossession through the chief metropolitan magistrates and the district magistrates, which normally takes 18-24 months, should offer a speedier recovery.
Apart from the standardised protocols around loan recovery, inclusion under the SARFAESI Act would allow lenders to take over the management of a borrower's business if the defaulted borrower does not discharge his liability in full, states the research report.
Citing the fiscal 2013 data of the Reserve Bank of India, the report states that non-performing assets (NPA) recovery through the SARFAESI Act (as opposed to debt recovery tribunals and other recovery means) accounted for about 80 percent of the total amount of the banking sector's NPAs recoveries at Rs.232 billion, and the collection rate was 27.1 percent.
Among the NBFCs that are active in loans against property field (LAPs) and that would benefit from the central government's proposal are Cholamandalam Investment & Finance, Indiabulls Financial Services, Magma Fincorp, Reliance Capital, Religare Finvest and Fullerton India Credit Company, which have all been active in securitisation, the report states.
According to Srinivasaraghavan, the applicability of the SARFAESI Act to NBFCs will not result in cheaper funds or better credit rating.
"SARFAESI Act will enable faster repossession of delinquent customers property and help in keeping delinquencies low. This will place NBFCs at par with banks in enforcing their rights over the security of the assets pledged/hypothecated by the borrowers," Vellayan Subbiah, managing director, Cholamandalam Investment and Finance Company told IANS.
According to Subbiah, company's book size for mortgage loans is Rs. 6,407 crore and the gross NPA is 1.6 percent.