Overview of NBFC Debt Recovery Advisory

The Recovery Mechanism for NBFC is not covered under The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002(SARFAESI Act). SARFAESI Act was enacted to facilitate banks & financial institutions to realize their long-term assets, improve recovery by possession mechanism & thereafter selling & attaching them to reduce the NPA burden. Most NBFCs are unable to recover their debt portion. Many cases surmounting crores of funds are being dragged to court annually by NBFCs.

Though the Reserve Bank of India has strengthened NPA Norms, it has not laid out clear guidelines on recovery mechanisms or enacted any provisions that can entail an NBFC to take action against the defaulters. The RBI working group panel has recommended Act, i.e. SARFEASI to be extended to NBFCs. Currently the applicability is just confined to

NBFCs registered with RBI have an asset size of 500 Crore i.e. strategically important NBFCs.
Notified NBFCs by RBI in this behalf.
Contracts or business deals involving funding of more than 1 Crore.

Applicability of SARFAESI Act on NBFCs

The prior eligibility limit for NBFCsis Rs.500 crore of asset size or loan size of Rs.1 crore for debt recovery.
The eligibility limit for NBFCshas been reduced to Rs.100 crore of asset size and Rs.50 lakh on loan size. Situations under which notice period can be waived.
Procedure for taking possession of property/vehicle/ asset.
The arragment has to be made for providing final chance to the borrower for repayment of the debt before sale/auction of property/ vehicle/asset
Procedure for giving repossession to the borrower.
Procedure for sale/auction of the property.

Eligibility Criteria for Debt Recovery for NBFC’S: SARFAESI Act

The reduction in eligibility limit for NBFCs would mean that now Non Banking Financial Corporation's debt recovery enforces the security interest for small sized loans.
Consequently, improves the NBFC's ability to recover smaller loans and improvise the financial health of NBFC debt recovery with all inadequate performing assets of lower value.
The SARFAESI Act allows lenders to auction properties of defaulters to recover their dues.
The rights under the SARFAESI Act will be available even if the lender has initiated recovery proceedings through other methods.
More than 80% of cases in the NBFC sector are below Rs. 50 lakh bracket and hence the government should have considered a lower threshold like Rs. 5 lakh.
According to CRISIL, a rating agency, the reduction for applicability under the SARFAESI Act is affirmative action. It will bring an additional 12-15 % of NBFC's loan against the property, which stands at around Rs 1 lakh crore in March 2019, under the SARFAESI Act.

RBI Guidelines related to Recovery of Loans

Each NBFC shall put in place a mechanism for identifying the borrowers facing repayment-related difficulties, engaging with such borrowers, and offering them with necessary guidance about the recourse available.
Recovery shall be made at a designated place, which is decided mutually by the borrower and the RE. However, field staff shall be allowed to recover at the borrower's residence or work if the borrower defaults to make appearance on two or more successive events.
NBFC or its agent shall not engage in any harsh methods toward recovery. The following practices shall be deemed as bad/harsh.
Use of abusive or threatening language.
Persistently calling the borrower before and after working hours.
Harassing relatives, family, friends, co-workers or neighboursof the borrower.
Publishing the name and details of borrowers.
Use of violence against the borrower orborrower's assets/family/ reputation.
Misleading the defaulter about the extent of the debt or the consequences of non-repayment.
Each NBFC shall have a dedicated mechanism for redressal of recovery related grievances. The details of this debt recovery mechanism shall be provided to the borrower at the time of loan disbursal.

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Engagement of Recovery Agents

The agents shall mean agencies engaged by the NBFC to recover dues from its borrowers and the employees of these agencies.
The Regulated Entities shall conduct a due diligence, which shall, inter alia, cover individuals involved in the recovery process.
NBFCs shall ensure that the recovery agents engaged by them verify the antecedents of their employees, which shall include police verification.
The Regulated entities shall provide the details of recovery agents to the borrower while initiating the recovery process.
The agent shall always carry a copy of the notice and the authorization letter from the Regulating entities along with the ID card issued to him by the NBFC or the agency. Further, where the agency is changed by the regulating entity during the process of recovery, in addition, RE shall notify changes made to the borrower, the new agent shall carry the notice, the authorization letter, and his card.
The updated details of the recovery agencies engaged by the NBFC shall also behosted on the official website of the regulated entities.

Alternative RecoveryMechanism or Recovery Policy for NBFC

Every NBFC should lay down Board -approved Recovery policy to run their NBFCs effectively.The fundamental aim of the recovery policy of NBFC is to facilitate recovery of the dues in the event of non-payment of debt. The recovery policy should emphasise fairness and transparency in repossession, valuation, and realisation of security. The recovery standards adopted by the NBFC for follow-up and recovery of debts shall adhere to laws.

Framework for Recovery Policy of NBFC

There are important points that are to be taken into consideration while framing the recovery policy.

The Recovery Policy's objective should be to serve the customers' interests and adhere to the notifications, Master Directions, and Circulars issued by RBI. It also aims to reduce NPAs level in absolute terms and make provisions for accelerating recoveries over the existing Non-Performing Assets.
A Grievance Redressal Mechanism must be addressed in the Recovery policy, and it should lay the proceduresto settle the disputes between the company & the customers and time period for the resolution of the Complaint.Make sure that all disputes arising out of disputes between the customers & third parties are heard & disposed of at a higher level.
A Recovery Policy must follow the Fair and Practice Code, approved by the management of NBFC. The Fair and Practice Code must have instructions and methods for the recovery of dues. The NBFC recovery process should not resort to undue harassment viz. persistently bothering the borrowers at odd hours, using muscle power to recover loans, etc.

The BoDs should also provide for a periodical review of the Fair Practices Code Compliance and the functioning of the grievances redressal system at different levels of management.

Manner of Recovery must be defined in detail in case post-dated cheques and non-receipt of payment on due date are presented to recover debts. In case of dishonour of cheque, the appropriate remedy under NI Act, 1981 must be exhausted.
In the case of secured loans, a recovery mechanism & an enabling clause should be inserted in the Loan Agreement, generally called as ‘Re-possession Clause’, which is legally enforceable.
Policy should clarify the respective dates for payments, Interest rate charged, the penal interest rate on delayed payments and appropriate notice period to take action against the defaulting borrower.In genuine cases where certain borrowers face difficulties in clearing their dues on the scheduled instalments, their accounts may be restructured adequately before such loans become NPAs as per Board-approved restructuring.

It is pragmatic analysed whether the Recovery Mechanism for NBFC is badly hit due to bad credit appraisal mechanism/Paper works problems/ repaying habits of the borrower/inadequate collection process in NBFC.

Recovery under NI ACT

Many instances have been noted for default payments which attract the punishment and penalties under the Negotiable Instruments Act, 1881. A formal application is filed to the Debt Recovery Tribunal under the SARFAESI Act for the Recovery of Debt. A Civil Suit ina court of law can also be filed for confiscation and seizing of the borrower's property for the realisation of debt.

Management of Fund Transfer (Receivable)

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

The primary 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.

Process of recovery

An opportunity is provided to all the borrowers if they face difficulty repaying the debt EMIs within the specified time. They can come to NBFC for Restructuring of Debt to make the repayment process flexible.
The RBI guideline states that the NBFCs must provide a reasonable amount of time to pay the due amount and an opportunity to be heard to state the reasons for the non-payment of debt. In case of any demise like death, severe ill-health or accident, the NBFC gives time lag to the customers and their families.

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

Frequently Asked Questions

Yes NBFC is eligible to approach the Debt Recovery Tribunal under SARFAESI Act.

For determining the amount of debt, the definition provided under the SARFAESI Act, 2002 shall be considered. Acc. to the definition, the amount of debt shall mean any liability claimed as due from any person/individual by the secured creditor and legally recoverable on the date of the application. Thus, the amount of debt would include the following

The Principal Amount of the debt
Interest (Applicable)
Penalties
Any other costs or charges paid by the borrower as agreed over the agreement.

The SARFAESI Act is not applicable for

The NPA loan accounts amounting to less than 20% of the principal amount and interest accumulated.
Money or security issued under the Indian Contract Act or the Sale of Goods Act, 1930.
Any rights of the unpaid seller under Section 47 of the Sale of Goods Act, 1930.

Section 26B of the SARFAESI Act, 2002, lays a compulsion on every authority or officer of the Central Government or any State Government or local authority, responsible for carrying out the function of recovery of tax or other Government dues to file particulars of creation of security interest with Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI). However, no such compulsion is laid on secured creditors or other creditors covered under the SARFAESI Act. Accordingly, the requirement of filing particulars of creation of security interest is mandatorily applicable only on government, local authorities or their officers. Thus, eligible NBFCs are not compulsorily required to file particulars of creation of security interest with CERSAI.

The Reserve Bank of India regulates NBFCs and as per the prudential norms issued by the RBI, a loan can be treated as secured only if some form of tangible property backs the same. Therefore, from a regulatory aspect, a loan backed by unsecured receivables will not be considered a secured loan, whereas a debt backed by a mortgage created on immovable property or any other tangible property will surely do.