Business
Moody's, finance firms give thumbs up for asset act
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.