Non-banking finance companies (NBFCs) have managed to convince the finance ministry and the Reserve Bank of India that they have been severely crippled by the restrictions on recovery of loans from borrowers. RBI is working on revising the norms for repossession of mortgaged assets by lenders. This could mean some police support to recovery agents when they approach difficult borrowers.

The current RBI guidelines on repossession stipulate that lenders have to take recourse to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Sarfaesi Act) and the Security Interest (Enforcement) Rules, 2002 to recover the amount of loan by repossessing and disposing of the collateral without the intervention of court. The Sarfaesi Act, which applies only on loans over Rs 1 crore, requires that the lender give a 60-day notice before taking possession of the property.

But this notice is not required in the case of hire purchase contracts?where the loan has been taken against the property purchased with the borrowed money, as in the case of automobiles. But RBI?s directions are that the lender should not repossess such a property by exercising force.

After a Supreme Court (SC) direction about the questionable means adopted by lenders? recovery agents in 2007, RBI had asked banks to inform the borrower the details of the repossession agency. The central bank may now alter the extent of information lenders need to give about these agencies.

?The SC direction has been interpreted as if banks do not have any right to repossess the property. This is one of the factors that hinders lending for homes and automobiles. There has to be a balance for both the lender and a review of guidelines is going on in RBI,? a senior official in the finance ministry said.

An RBI spokesperson confirmed the move to FE . ?There is an umbrella on outsourcing of financial services, comprising recovery and repossession. There is something going on regarding that. But we don?t reveal the details till the document is signed,? she said.

Sundaram Finance deputy managing director Srinivas Acharya said, ?Generally, defaulters approach courts and consumer forums, making false claims about the use of force during repossession. They also make a scene at the site of repossession. To avoid this, we have suggested that the police should assist us in taking the possession. RBI has told us that they are looking at the proposal very seriously.?

The beleaguered NBFC industry had made the suggestions at their meetings with RBI and finance ministry officials in October and November, said a senior official of Finance Industry Development Council, the industry?s self-regulatory organisation.

Acharya said that strict guidelines on repossession are affecting lending for purchase of assets. ?Strict repossession norms affect lending in a way that we take stricter due diligence of the borrower to minimise the chances of defaults because we know that in case of default, repossession would be difficult.?

As a consequence of lower lending, sale of assets has been falling of late. Car sales fell 19% in November compared to last year, while sales of houses were down 30-40% during April-October.

With the slowdown in sales, the government has been asking banks to increase the flow of funds and reduce interest rate. Public sector banks have already reduced benchmark prime lending rates between 50-75 basis points and interest rates on home loan up to Rs 20 lakh.

At present, home loan rates average around 10.5% for loan below Rs 20 lakh and 12% for a higher sum. For cars, interest rates hover around 12.5-16%.