The high-powered advisory committee headed by Alok Nigam, joint secretary in the department of financial services has submitted its recommendations on legislative changes for NBFCs, sources told Moneycontrol.com. Some critical issues include Money Lenders Act, Recovery of Debts Due to Banks (RDDB) Act, willful defaulters and Takeover Code.
Amid rising concerns over the functioning of non-banking finance companies (NBFCs), the high-powered advisory committee headed by Alok Nigam, joint secretary in the department of financial services has recently submitted its recommendations on legislative changes for NBFCs, sources told Moneycontrol.com. Some critical issues like Money Lenders Act, Recovery of Debts Due to Banks (RDDB) Act, willful defaulters and Takeover Code exemption have figured in the report.
“We have already submitted our report to the FinMin. It has been sent to the RBI for implementation and regulator now has to take a call. I think the RBI is considering all the proposals for policy changes in the NBFC sector,” an official from the Finance Ministry said on condition of anonymity.
The Nigam committee is in favour of excluding NBFCs from states’ Money Lenders Act. There is an on-going debate on this particular issue. In one case, it is before the Supreme Court.
“There are certain states where there is no clarity as to whether the Money Lenders Act applies to NBFCs also. This has led to significant debate in the country. To avoid to dual registration requirement and dual regulation of NBFCs, it is critical that all NBFCs are excluded from the ambit of the respective state Money Lenders Act,” it committee said.
According to the recommendations, NBFCs should be allowed to recover their debt under Recovery of Debts Due to Banks and Financial Institutions or RDDB Act in line with banks. The committee has urged the Ministry of Finance to consider bringing NBFCs under the purview of the RDDB Act.
“This will empower NBFCs in recovering their loans on par with banks and without significant delays. The existing procedure for recovery of debts by NBFCs, which takes a lot of time, has resulted in NBFCs treating a significant portion of their debts as unproductive loans,” the report said.
Moreover, the committee has suggested the extending of provisions of wilful defaulters to NBFCs as well along with banks. In case of deliberate loan defaults, credit information goes to credit information companies (like CIBIL), which in turn alert banks and financial institutions as to ensure that further bank finance is not made available to them.
“We believe that the aim to restrict the willful defaulters from further financing can only be achieved if the provisions of wilful defaulter shall be made applicable to NBFCs,” the committee said.
Meanwhile, the committee has also advocated extending the exemption under Takeover Code to NBFCs. Given its implementation, NBFCs can take bigger credit exposure in a company while maintaining its asset quality.
If a company takes loan from any bank by pledging its shares and then defaults, the lender will sell its pledged shares. In this case, the invocation of pledge shares by the lender is considered as acquisition in ordinary course of business and is exempted from the requirement of open offer. However, it is so far not applicable for NBFCs.
In the second half of 2011, the finance ministry had decided to set up the Nigam committee to review the functioning of the non-banking finance companies (NBFCs).
READ MORE ON non-banking finance companies , NBFCs, Money Lenders Act, Recovery of Debts Due to Banks , RDDB) Act, Takeover Code , Alok Nigam, FinMin, Saikat Das
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