Recovery Mechanism for NBFC: NBFCs Recovery Mechanism

Narendra Kumar

31 Dec, 2020

Recovery Mechanism for NBFC is not covered under the SARFAESI Act. Though RBI^[1] has strengthened NPA Norms, it has not laid out clear guidelines either on recovery mechanism or basically the provisions which can entail an NBFC to take action against the defaulters.

Most NBFC’s are unable to recover their debt portion. A lot of cases surmounting to Crores of funds are being dragged to court every year by NBFC’s.

The panel in the RBI working group has recommended Act i.e. SARFEASI to be even extended to NBFC’s as well. Right now the applicability is just confined to:

• NBFC’s registered with RBI having an asset size of 500 Crore i.e. strategically important NBFC’s.
• Notified NBFC’s by RBI in this behalf.
• Contracts or deals involving funding of more than 1 Crore.

*SAFEASI Act was enabled to facilitate banks & financial institutions in order to realize their long-term assets, improve recovery by possession mechanism & thereafter selling & attaching them for reducing NPA burden.

What will be the Alternative Mechanism?

Every NBFC should lay down appropriate grievance redressal mechanism within the organization to settle the disputes between the company & the customers.

• Making sure that all disputes arising out of disputes between the customers & third parties are heard & disposed of at a higher level.
• In the matter of recovery of loans, NBFC recovery process should not resort to undue harassment viz. persistently bothering the borrowers at odd hours, use of muscle power for recovery of loans, etc. As complaints from customers also include rude behavior from the staff of the companies. NBFCs shall ensure that the staff is adequately trained to deal with the customers in an appropriate manner.
• The Board of Directors should also provide for a periodical review of the compliance of the Fair Practices Code and the functioning of the grievances redressal mechanism at various levels of management.
• In the case of secured loans, recovery mechanism & an enabling clause should be there in the Loan Agreement, in general parlance called as ‘Re-possession Clause’ which is legally enforceable.

What will be the terms Related to this?

• Notice period before taking possession.
• Circumstances under which notice period can be waived.
• Procedure for taking possession of property/vehicle/ asset.
• Provision for final chance to be given to the borrower for repayment of the loan before sale/auction of property/ vehicle/asset
• Procedure for giving repossession to the borrower.
• Procedure for sale/auction of the property.

*It is a matter of fact to be analyzed whether the Recovery Mechanism for NBFC is badly hit due to the scaling down of the credit appraisal mechanism or due to the documentation problems or due to the repaying habits of the borrower or due to the inadequate collection process in NBFC.

Receivable Management

It encompasses the collection & management as well as processing of the activities involved in fund transfer. It calls for designing an appropriate collection policy by the organization.

The basic objective while formulating the collection policy is to ensure the earliest possible payments on receivables without any customer loss through an ill will.

Prompt collection of accounts tends to reduce the investment required to carry receivables and the costs associated with it & the ratio of bad debts is likely to decrease.

Analysis

A chance is given to all the borrowers if they are facing any problem in repaying the EMI’s on time. They can approach the NBFC and ask to restructure the loan to enable the smooth repayment process.

Just a single missed the opportunity and it can bring huge losses for the registered NBFC. The RBI guideline^[2] states that the NBFC’s have to give a reasonable amount of time to pay the due amount along with an opportunity of being heard. In case of any demise like death, serious ill-health or accident the NBFC gives time lag to the customers and his family.

The provisions which can entail an NBFC to take action against the defaulters must always have a clear picture of your financial health. They should be aware of when you can resume your payments on time.

Conclusion

Pulling one’s hands from unnecessary expenses can add a sum of amount to your savings and help to repay your debts on time. It’s not only a moral obligation but also a legal responsibility to pay off your loan dues completely and that too on time as agreed between the lender and the borrower.

A few easy ways can sort the situation temporarily but still, it is important to ensure that you pay all your dues and your creditworthiness is not harmed in any way.