As we look towards the future of India’s banking sector, the Insolvency and Bankruptcy Code (IBC) will continue to serve as a critical framework. However, the SARFAESI Act also requires attention and enhancement to fulfill its potential. Currently, SARFAESI serves as the second most effective tool for banks in managing stressed assets, following the IBC. Unfortunately, its contribution to total recoveries has declined, dropping from 30.5% in 2021-22 to 24.6% in 2022-23. To maintain its effectiveness, policymakers must consider broadening the user base of the SARFAESI Act.
The Need for Inclusion of Alternative Investment Funds and Mutual Funds
Alternative Investment Funds (AIFs) and Mutual Funds (MFs) primarily operate within the unlisted debt market but are not granted enforcement rights under the SARFAESI Act. This exclusion starkly contrasts with the rights enjoyed by debenture trustees for listed secured debt securities, banks, and Non-Banking Financial Companies (NBFCs). This legal oversight creates an unjust disparity in enforcement mechanisms between unlisted and listed bonds, with significant implications for investor protection.
Recent data shows that, as of May 2024, MFs have allocated 14.03% of their debt investments to corporate debt, excluding PSU bonds. Similarly, Category I and II AIFs, which predominantly invest in unlisted securities, had 35.86% of their total investments in debt securities by March 31, 2024. Given these substantial figures, the exclusion of MFs and AIFs from SARFAESI’s enforcement mechanisms jeopardizes investor interests and limits the act’s effectiveness. It is crucial for policymakers to rectify this by including AIFs and MFs within the definition of “financial institutions” in the SARFAESI Act.
Time-Bound Approvals: A Long-Awaited Necessity
Another pressing concern for the financial sector is the need for time-bound regulatory approvals. The Financial Sector Legislative Reforms Commission (FSLRC) recommended back in 2013 that financial regulators should ensure applications are processed within a specified timeframe. Although the Reserve Bank of India (RBI) issued indicative timelines for regulatory approvals in 2014, these should be made mandatory to enhance private investment confidence.
Consider the complexities involved in transactions that change the control, ownership, or management of a listed NBFC, which require prior RBI approval. Although RBI indicates a 45-day timeline, actual processing often exceeds this due to delays and additional queries. Such uncertainties can inflate transaction costs, adversely affecting private equity and strategic investors who rely on timely decisions.
Addressing Financing Access for Resilient Entities
Furthermore, access to financing for entities that have emerged from insolvency remains a significant issue. The RBI’s current regulations do not address this gap, leading lenders to hesitate in extending credit to businesses with previous defaults. This mindset restricts the growth of bank credit, as the market increasingly turns to private credit solutions. It is essential to evaluate these entities on their current merits, moving beyond the outdated principle of “once a defaulter, always a red flag.” Competitive bank financing is crucial for corporate growth, necessitating clarity and reform from the RBI.
As we move forward, with major insolvency challenges behind us and a growing demand for credit, India is strategically positioned to implement these vital reforms in its banking sector.