Expanded Sarfaesi Act credit positive for some NBFCs: Moody's

Says repossession through the Chief Metropolitan Magistrates and District Magistrates, which normally takes 18-24 months, should offer a speedier recovery

The Budget proposal to include non- banking finance companies (NBFCs) under the Sarfaesi Act is credit positive for lenders of loans against property, a leading rating agency said today.

"The move would be credit positive for lenders of loans against property. Residential mortgage-backed securities (RMBS) originated by NBFCs would also benefit from speedier loan recovery," Moody's said in a report.

Loan against properties are often taken out by small business proprietors who repay the loan using cash flow from the business housed in that property.

The Securitisation and Reconstruction of Financial and Enforcement of Security Interest Act would expedite NBFCs' repossession of the underlying property backing the loan on it. NBFCs would have the ability to demand repayment of any defaulted loan within 60 days after the lender classifies such loans as non-performing assets, the report said.

Under the current practice, NBFCs must resort to civil court proceedings to recover their loans and take repossession of a property whose recovery time is difficult to determine.

"Repossession through the Chief Metropolitan Magistrates and District Magistrates, which normally takes 18-24 months, should offer a speedier recovery," Moody's said.

Among the NBFCs that are active in loan against property segment and would benefit from the proposal are Cholamandalam Finance, Indiabulls Financials, Magma Fincorp, Reliance Capital, Religare Finvest and Fullerton India.

Besides more standardised protocols around loan recovery, inclusion under the Sarfaesi Act would allow lenders to take over the management of a borrower's business if the defaulted borrower does not discharge his liability in full, Moody's said.

The proposal would come into effect from April 1 after Parliament passes the Budget.