The Reserve Bank of India (RBI) has objected to the finance ministry?s plan to give Sarfaesi Act-powers automatically to all housing finance companies (HFCs) registered with the National Housing Bank (NHB) to help them recover dues from borrowers quickly without court intervention.
Official sources told FE that according to the RBI, the ?stringent? Sarfaesi powers should not be given to institutions without proper due diligence of their management, track-record, borrower profile and default levels.
The RBI does not want the Sarfaesi powers to be misused by the HFCs and harass the borrowers, they added. Besides, since the Sarfaesi Act considers borrowers below a low threshold of R1 lakh as ?small borrowers? and exempts them from its purview, the definition of ?small borrower? will need to be amended to accommodate a higher level of borrowing to ensure that it fits in the context of housing loans, the banking regulator said.
Under the Sarfaesi Act, only scheduled commercial banks, public financial institutions (FI) and those lenders notified by the government as ?FIs? on a case-by-case basis have powers to enforce the security interest by taking possession of the assets from the defaulting borrower, following the expiry of a 60 days since a notice is issued classifying the loan as NPA, without court intervention.
Currently, only 20 of the 58 HFCs registered with the NHB have been notified as FIs under the Sarfaesi Act.
Under the NHB (Amendment) Bill, 2012, it was proposed that all NHB-registered HFCs be automatically given Sarfaesi powers ?to provide them a level playing field.?
The Bill also proposes to ensure uniform control over non-banking financial companies, including HFCs, for which it wants the registration and regulation-related powers over HFCs to be transferred from NHB to the RBI. The NHB, the Bill says, will focus only on supervision and financing of such institutions.
Though the Bill was placed before the last session of Parliament, it could not be taken up. Since getting it passed by Parliament would take time, the finance ministry wanted this specific provision ? of giving Sarfaesi powers to all HFCs ? be done through an executive notification.
However, the RBI also said that since the level of NPAs in the remaining HFCs not notified as FIs is very low, there is no need to rush with the notification without proper discussion. The ministry has now sought the opinion of the HFC regulator NHB also. The plan, if cleared by the RBI and NHB, would need the Election Commission?s nod as well since the model code of conduct before the general elections is currently in force, the sources said.
NHB CMD RV Verma said if the Sarfaesi powers are automatically conferred on all HFCs, there is a moral hazard of them blindly extending loans without doing proper due diligence of their borrowers, with the confidence that they can resort to Sarfaesi powers later on when the loans turn bad.
While willful defaulters need to be discouraged through deterrent laws like Sarfaesi, the lenders should also ensure that they do not dilute their due diligence of borrowers, he said, warning that, otherwise, the Sarfaesi powers could have a negative impact on borrowers and the entire housing segment.
