Why is RBI not supportive of giving SARFAESI to all HFCs
Why is the Reserve Bank of India, not supportive of giving the benefit of SARFAESI to ALL HFCs?
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) Act, was instituted in the year 2002. One of the key purposes of the Act was to give more teeth to specified categories of lending institutions, in recovering the money from defaulting borrowers, who have borrowed loans against a security, more popularly a mortgage. Over time, the Act has acquired prominence and has been used widely by secured creditors in enforcing their security interest against defaulting borrowers.
The benefits under the Act for enforcement of security interest, currently are available to all scheduled commercial banks, public financial institutions and certain lenders specifically notified by the government on a case-to-case basis. Housing Finance Companies, that are regulated by the National Housing Bank, do not automatically get the benefits of SARFAESI. They have to get a special approval from the Finance Ministry, supported by a review by National Housing Bank, to be able to use SARFAESI against defaulting borrowers.
The National Housing Bank (Amendment) Bill, 2012, that was presented in Lok Sabha, contained an amendment that read as below:
‘It is proposed to amend the said Act (SARFAESI Act), as to make a provision to cover all the Housing Finance Institutions (HFCs), which are companies registered under the NHB Act for the purposes of the said Act to provide them level playing field.’
While passing the entire amendment bill may take time, there was a move by the Finance Ministry to get this specific amendment cleared through an executive notification.
As per an article in the Financial Express of date 26th March 2014, RBI has opposed this move to bring in all the HFCs automatically covered under the SARFAESI Act. Link to the news item is here :
The reasons mentioned in the article include (a) probable misuse of the Act by HFCs and (b) NPAs being low with HFCs not notified for SARFAESI and hence the issue is not a burning one to be closed out fast.
RBI also wants to increase the limit of Rs.1 lac, which is the loan amount cut off for exempting cases falling under SARFAESI, i.e any case below the loan amount of Rs.1 lac, does not fall under SARFAESI. This suggestion that the limit of Rs.1 lacs should be increased is fine. In the context of housing loans, the ticket sizes are much higher and therefore what constitutes a ‘small loan’ could be redefined. This would exempt borrowers with lower loan amounts from being covered under the Act.
However not supporting automatic coverage under the Act for HFCs is a disappointment. The arguments of anticipated misuse and /or lack of a need to rush because NPAs in this segment of HFCs is low, do not hold much water.
The reasons are as below:
- Housing Finance / Mortgage backed loans need to grow for the direct and indirect benefits that they bring to the economy. Amongst all the secured loans that are given in this country, loans for housing (with mortgage of the property) constitute the highest segment. This loan segment has several direct and indirect benefits to the economy. Availability of loans for housing purposes would encourage faster development of support infrastructure and also bring upon various indirect growth benefits to other industries that develop along with the real estate. Making SARFAESI available to HFCs, would make them more comfortable to lend and thereby indirectly promote growth of housing in the country.
- The argument of misuse would include irresponsible lending by the lenders (banking on powers under the Act) and perhaps leading to harassment of genuine borrowers. Now, even if one were to follow the proper procedure under the SARFAESI, practically it takes on an average 6 months (post initiation of procedures under the Act on an account becoming an NPA) to get what is referred to as ‘symbolic possession’ under the Act……and that is if everything goes well and smooth. This is a good 9 to 10 months, after the borrower would have actually started defaulting. Beyond this, it could take a few more months to actually take physical possession of the property and auction the same. No prudent lender would want to put itself in that position. The first priority for all lenders is to get back the money as fast as possible. Waiting for close to 1.5 years to recover the money in a large number of cases, is not something that any prudent lender would want. There is no case therefore to believe that lenders suddenly become irresponsible in lending. The second issue of harassment of the borrowers should arise if the borrower is genuine and the lender has not made all efforts to recover the money through regular means or has not followed the proper procedure under the law. While there could be cases where the borrowers have been unduly harassed, in comparison to the overall benefits derived as a result of the Act, such instances are few and need to viewed as aberrations. The particular lenders who have resorted to harassment of genuine borrowers, should be penalized appropriately by the regulator. And for this to happen, the regulators could tighten the supervisory mechanisms to ensure that Act is not misused. Like any other procedural requirement controlled by the regulators, this issue also can be controlled by suitable supervision .
- The article also mentions RBI taking a stand that as NPAs with HFCs not notified under SARFAESI are low, there is no need to rush. Various estimates place the bad loans in the economy at astronomical figures of over Rs.2000 bn by end of 2014. One need not be content that the bad loans in the HFCs not-specified for SARFAESI are low and therefore there is no need to rush. Risk Management experience in the past has clearly highlighted that it is extremely difficult to turn around a bad portfolio. A bad portfolio should not just be measured in terms of the % of bad loans, but the absolute amount outstanding as well. The %age of bad loans can be made extremely attractive by increasing the volume of business (the denominator factor). However, the absolute amount that is going bad, seen with its ‘lag effect’ is the true reflection of bad loans and there must be no room for contentment here.
In our view, the overall benefits that are derived out of making SARFAESI available to all HFCs, outweigh the issues that are getting highlighted as probable negative consequences. We therefore feel that support from RBI for this amendment would be of immense help to the housing finance sector directly and it would also help in a gradual cascading effect on the economy through growth of support infrastructure as a result of growth in real estate.