The central government's move to extend the applicability of SARFAESI Act to non-banking finance companies (NBFC) would speed up recoveries by these firms, according to Moody's Investors Service.
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 Indian government's move is a "credit positive" for lenders of loans against borrower properties-residential and commercial.
Residential mortgage-backed securities (RMBS) backed by loan against property (LAP) originated by these NBFCs would also benefit from speedier loan recovery, the research 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.
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Under the current practice, 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 Reserve Bank of India, the report states that 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 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.