CHENNAI: The Budget proposal to treat non-banking financial companies (NBFCs) as financial institutions under the SARFAESI Act will be a big boost to the sector. A long-standing demand of the industry, this will allow NBFCs to enjoy the benefits that presently apply only to banks.
“To bring parity in regulation of NBFCs with other financial institutions in matters relates to recovery. It is proposed that NBFCs registered with RBI and having asset size of Rs.500 crore and above will be considered for notifications as ‘financial institution’ in terms of the SARFAESI Act, 2002,” said the Finance Minister in his budget speech.
NBFCs are not covered under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act. Though the Reserve Bank of India has tightened the NPA recognition norms, it has not laid out clear guidelines either on the recovery mechanism or the provisions for NBFCs to take action against defaulters under SARFAESI Act.
Most of the NBFCs are unable to recover bad debts. There have been lakhs of cases that are dragged to court every year by NBFCs. Hence, the working group of RBI, headed by Usha Thorat, had recommended that the Act be extended to cover the NBFCs also.
Thus, the budget announcement is a big boost to NBFCs. The measure will help strengthen the recovery capabilities of NBFCs. The Sarfaesi Act was enacted to facilitate banks and financial institutions to realise long-term assets, improve recovery by exercising powers to take possession of securities, and sell them in order to reduce NPAs.
“It is a huge positive for NBFCs. This will enable lending with greater confidence as they can be assured of speedier recovery,” said V. Vaidyanathan, Chairman, Capital First Ltd.
