Expansion of SARFAESI Act credit positive for lenders of LAPs says Moodys

On 28 February, India’s Finance Minister Arun Jaitley, as part of India’s union budget for the fiscal year ended 31 March 2016, proposed designating non-banking finance companies (NBFCs) with assets of more than Rs5 bn as “financial institutions” under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act).

Mar 09, 2015 05:03 IST India Infoline News Service

On 28 February, India’s Finance Minister Arun Jaitley, as part of India’s union budget for the fiscal year ended 31 March 2016, proposed designating non-banking finance companies (NBFCs) with assets of more than Rs5 bn as “financial institutions” under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act). Such designations would be credit positive for lenders of loans against property (LAPs), which 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.
LAPs are often taken out by small business proprietors who repay the loan using cash flow from the business housed in that property. 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 nonperforming assets (NPAs). The budget, including the proposal, must pass the Parliament to become effective in the new fiscal year starting on 1 April.
Among the NBFCs that are active in LAPs and that would benefit from the 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), which have all been active in securitization.
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, the country’s central bank, 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 INR232 billion, and the collection rate was 27.1%.
The author is Georgina Lee, Assistant Vice Present, Structured Finance Group, Moody's Investors Service Hong Kong Ltd and Elaine Ng, Vice President - Senior Analyst, Structured Finance Group, Moody's Investors Service Hong Kong Ltd.

Related Story