Abstract

When the RBI’s Governor, Raghuram Rajan, took charge in 2013, “the gross and net Non-Performing Assets (NPAs) in the banking system had hit an alarming 4.2% and 2.2%, respectively, against an average of 2.6% and 1.2%, respectively, between 2009 and 2013.” This was a sign of a growing issue in the economy, later termed the “NPA Crisis”, which occurred between 2015 and 2018 when “the gross NPAs of the Indian banking system reached 11.5% of the total advances of the banking sector. The gross NPAs of PSBs were reportedly as high as 14.6% while net NPAs had reached about 8.5%.” Various legislations existed to address this issue, such as the Lok Adalat, Debt Recovery Tribunal and the SARFAESI Act. While substantial measures by the government resolved the crisis, there was one sector in the nation’s economy, the Non-Banking Financial Sector (NBFCs), that was unable to tackle the challenges of unrecovered debts and NPAs even through the SARFAESI Act. Although included under the Act later, the NBFCs still find it a huge task to recover debts and deal with NPAs.

This paper briefly discusses this Act, its issue, and its efficiency, further evaluates the effects of lowering the current threshold of the SARFAESI Act for the NBFCs, and proposes some policy recommendations. The main issue that this paper focuses on is the inequality between the banking and non-banking financial sectors with respect to the ability to recover NPAs under the SARFAESI Act. While the banking sectors have been legally allowed to recover NPAs as low as ₹1 lakh, the threshold for the NBFCs is ₹20 lakh. Thus, small-level NBFCs struggle to recover debts that do not fall under this monetary threshold. Hence, this paper suggests specific reforms to the government to reduce the threshold for specified borrowings, enable a moderating body to attend to disputes, create awareness, and encourage borrowers to settle their debts on time.

Introduction

The banking and non-banking sectors of finance have massive significance in shaping and developing the Indian economy. They promote credit flow, grant investment loans for individuals and businesses, enhance financial inclusivity, aid in infrastructure development, and drive comprehensive economic growth. Banking sectors here generally focus on traditional financial services like giving loans, credit cards, and checking and savings accounts. Non-Banking Financial Companies (NBFCs) work in rural and semi-urban areas nourishing Small and Medium Enterprises (SMEs) and Micro, Small, and Medium Enterprises (MSMEs) by aiding them with financial assistance. 

These NBFCs offer financial services such as money lending, leasing, hire-purchasing, insurance, and so on, but they are not technically “banks” with proper licensing. The main feature differentiating them from banks is that an NBFC cannot accept demand deposits of its own. The NBFCs come under the Reserve Bank of India’s (RBI) purview.

The NBFCs lend money to businesses or individuals, classified based on their utility as secured or unsecured. A secured loan is where the loan is provided to the borrower with an asset that is required to be put up as collateral. These assets may include land, houses, and vehicles, along with a few others. An unsecured loan is provided to the borrower without any asset as collateral, based on the borrower’s promise to repay and creditworthiness. For this paper, the secured loan alone is taken into consideration. Every loan is provided with a rate of interest for the borrower to repay. The borrower is expected to pay for the loan along with the interest amount for a specified period until the loan is fully repaid.

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