NBFCs allowed now to use SARFAESI Act to recover dues
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NBFCs now have recourse to defaulters through SARFAESI
Budget 2015 brings fresh tidings.
We are talking of only one issue here, that has been clearly addressed by Mr.Arun Jaitley, in his first full budget. And that is letting Non-Banking Finance Companies (NBFCs) reach out to defaulters through the SARFAESI Act (The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002).
All along, SARFAESI Act was available only for Banks and Housing Finance Companies (HFCs). HFCs are the companies that are specially licensed by the National Housing Bank (NHB) to do the business of lending for home loans. HFCs are regulated by NHB. While RBI regulates both Banks and the NBFCs, for certain reasons best known to the policy makers, recourse under the SARFAESI Act was made available only for the Banks. Now after a period of over 12 years of enactment of the Act, NBFCs have been brought into the ambit of this law.
As per the budget 2015 announcement, NBFCs with assets of Rs.500 crores and above will be allowed to use SARFAESI Act, further adding that this is aimed at bringing parity in regulation for NBFCs with other financial institutions in matters relating to recovery. This of course would be applicable for NBFCs which are registered with RBI. Naturally, this development has been welcomed by all in the industry. This will expedite the debt recovery process and help contain the overall bad debts in the system. As one of the CEOs of a top NBFC mentioned, “Earlier, to recover loans it used to take 2-2.5 years as legal processes take long time. This move will accelerate the recovery process and will bring down the NPA recovery time to 6-8 months”. It is widely known in the industry that NBFCs had been facing problems in recovering debts in sticky accounts. There are a large number of cases which are placed in the courts month after month. The mounting situation of bad-debts was getting ominous.
The recommendation to include NBFCs under SARFAESI came from the working group of RBI headed by Ms.Usha Thorat (former Deputy Governor of RBI). This is a shot in the arm for NBFCs.
We do hope that NBFCs use the applicability of this act judiciously, use this benefit to grow their business in the right segments, achieve great success in recovering their dues and improve their profitability.
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Sitaraman is an expert in Risk Management with over 23 years of experience in the lending industry. He has written a thought provoking book, a thriller fiction - The Whistleblowers (Published by Westland Ltd.). To know more about the book, click here – The Whistleblowers by Sitaraman (Westland Ltd.). The book gives inside insights to a layman on how Risk Management works in a lending organisation and also helps the reader to the right things while putting all his / her savings in buying a property.