The finance ministry has said the budgetary proposal to give NBFCs with an asset size of over R500 crore the power to recover bad loans invoking Sarfaesi Act is mainly to ensure they increase lending to infrastructure projects.
Under the Sarfaesi Act, lenders (banks and lenders notified as FIs) have the power to enforce the security interest by taking possession of the assets from the defaulting borrower without court intervention, on the expiry of a 60-day notice period after the loan is classified a non-performing asset.
“We did it to encourage them to take more risks. Now that they have the Sarfaesi weapon, we hope there will be more NBFC-infrastructure financial companies (NBFC-IFC) and they will lend more to infra projects,” said financial services secretary Hasmukh Adhia. Though the RBI in 2010 had created a separate category of NBFC-IFC, there are only a handful of active NBFCs such as IIFCL, L&T Infra Finance and Srei Infrastructure Finance in this category. Other player IDFC has opted to be a full-fledged bank.
The proposal will not only give an impetus to the model of existing NBFC-IFCs but encourage others to move into infra lending, said Raman Aggarwal, director, Finance Industry Development Council (the NBFC industry apex body). “Once the investment cycle restarts in the infrastructure sector and with NBFCs getting the security of Sarfaesi powers, we should hopefully see the advent of more NBFC-IFCs,” said Vimal Bhandari, CEO and managing director, Indostar Capital Finance and a member of CII’s NBFC committee.
So far, NBFCs, unlike banks and FIs, did not had Sarfaesi powers and, therefore, had to resort to legal measures like filing cases of cheating or cheque bounce against the defaulting borrowers, or had to proceed against them under the arbitration law, Aggarwal said. Without the Sarfaesi powers, and with many infra projects stalled, NBFCs were finding it difficult to obtain funds to finance core sector projects.
With the country likely to fail in achieving infrastructure investment target of $1 trillion (R55.74 lakh crore) in the 12th Five-Year Plan period (2012-17), the government is keen on tapping all possible sources of funds, including foreign investments in the form of pension funds and sovereign wealth funds as well as domestic investments.
In October last year, a panel led by Deepak Parekh had lowered infrastructure investment projections for the 12th Plan to R30.9 lakh crore from R51.46 lakh crore (estimated in its 2012 interim report) following slowdown of investments in the sector. The recent mid-year economic review had said that of the R18 lakh crore worth of stalled projects, 60% are in the infrastructure segment.
Under the RBI norms, NBFC-IFC is a non deposit-taking NBFC with minimum 75% of total assets deployed in infra loans and with a minimum net worth of R300 crore. They also need to have a minimum credit rating of “A” or equivalent by an approved rating agency, besides a 15% capital adequacy ratio with Tier I capital at 10%.