Economy

SARFAESI to NBFCs: A level-playing field?

Satyanarayan Iyer Mumbai | Updated on January 24, 2018 Published on February 28, 2015

The Budget proposal to give large non-bank finance companies (NBFCs) recourse to the SARFAESI Act to recover bad loans is a step towards creating a level playing field between large NBFCs and banks.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, empowers banks and financial institutions to attach pledged assets of the borrower in the event of the non-repayment of dues by the borrower.

Currently, only banks have recourse to the Act.

The Reserve Bank of India has lately sought to create a level playing field between large NBFCs and banks. The regulator has set out a roadmap for NBFCs to classify their assets as non-performing if the borrower has not paid for a consecutive period of 90 days.

While banks follow the 90-day asset classification norm, different NBFCs follow anywhere between 90 days and 180 days for classifying a loan as bad.

In response to RBI’s mandate, NBFCs said while the regulator wants to create a level playing field between NBFCs and banks, the former do not have recourse to important tools such as SARFAESI.

By giving access to SARFAESI, the Finance Minister has sought to remedy this anomaly.

In fact, large NBFCs are as systemically important as some of the mid-sized banks. The top five NBFCs control about 60 per cent of the industry’s loans, while there are over 12,000 NBFCs registered with the Reserve Bank of India.

Thomas Muthoot, CMD, Muthoot Fincorp, said in a statement, “The Act was enacted to enable banks and FIs to realise long-term assets, manage the problem of liquidity, asset-liability mismatches and improve recovery by exercising powers to take possession of securities, sell them, and reduce NPAs by adopting measures for recovery or construction.”

While the industry hailed the Finance Ministry’s move, it remains to be seen if the recourse to SARFAESI will strengthen the hands of the industry.

The experience with SARFAESI suggests that it has been far from fool-proof in helping banks recover their loans any faster. 

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Published on February 28, 2015
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