NBFCs finally get their due on debt recovery

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Published: March 1, 2015 1:09:03 AM

Finance minister Arun Jaitley has sought to make it easier for lenders to recover their dues...

Finance minister Arun Jaitley has sought to make it easier for lenders to recover their dues. While announcing the introduction of a bankruptcy law in FY16, Jaitley also brought non-banking financial institutions (NBFCs) under the purview of the Sarfaesi Act .

“It has been a long-pending request… Now, borrowers will start taking NBFCs more seriously,” said Ramesh Iyer, MD, Mahindra & Mahindra Financial Services.

The Bankruptcy Law Reform Committee interim report, released in mid-February, had stated that a comprehensive bankruptcy code, in line with global standards, would be ushered in next fiscal.

“We have been asking the government to look into BIFR and SICA… The new policy gives us hope,” said MS Raghavan, CMD, IDBI Bank.

“This will be a big impetus to the banking system, as despite being under the same regulator, the resolution process is much tedious for public sector banks than their private sector counterparts,” said Arun Tiwari, CMD, Union Bank of India.

Currently, there are two channels that address corporate bankruptcy — the Sick Industrial Companies Act (SICA) and the winding-up process for companies under the Companies Act.

However, loopholes often delay the recovery process. Cases are known to have languished with the Debt Recovery Tribunals for years, and recovery happening at a substantial discount to fair value of assets.

“The DRT system is functioning, though not to the level we would like it to. It is better than going to court, especially with respect to timelines,” said Animesh Chauhan, MD & CEO, Oriental Bank of Commerce.

Also, the government has empowered NBFCs with a loan book of more than R500 crore to initiate recovery proceedings under the Sarfaesi Act — a law that also empowers banks to initiate recovery proceedings against defaulting borrowers by auctioning their properties.

This is a rectification of a long-standing anomaly, considering NBFCs are also in the business of lending, with much higher risks.  The cost of funds of NBFCs exceeds those of banks by about 2.5%, say experts.

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