The budget announcement to expand the coverage of SARFAESI law to certain NBFCs would be “credit positive” for lenders of loans against property (LAP), global rating agency Moody’s has said.
Designating non banking finance companies (NBFCs) with assets of more than ₹ 500 crore as “financial institutions” under the SARFAESI law would speed up lenders’ repossession of LAP, according to Moody’s Credit Outlook.
This is because such 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).
LAP is a loan made against residential or commercial property already owned by the borrower
Residential mortgage backed securities (RMBS) backed by LAPs originated by these NBFCs would also benefit from speedier loan recovery, Moody’s has said.
LAPs are often taken out by small business proprietors who repay the loan using cash flow from the business housed in that property.
Among the NBFCs that are active in LAPs and that would benefit from the budget proposal are Cholamandalam Investment & Finance (unrated), Indiabulls Financial Services (unrated), Magma Fincorp (unrated), Reliance Capital (unrated), Religare Finvest (unrated) and Fullerton India Credit Company (unrated).
All these NBFCs have been active in securitization, Moody’s has said.
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 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.
Besides more standardized 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.
Based on fiscal 2013 data from the Reserve Bank of India, NPA recovery through the SARFAESI Act (as opposed to debt recovery tribunals and other recovery means) accounted for about 80% of the total amount of the banking sector’s NPAs recoveries at ₹ 23,200 crore, and the collection rate was 27.1%.