The non banking finance companies (NBFCs) have been finally allowed by the central bank to repossess the assets financed by them in case of default.

NBFCs had been waiting for RBI's approval to permit them to repossess assets if their borrowers defaulted on the loan repayment.

Although the approval has been sanctioned by the RBI but it also said that the loan agreement between the lender and the borrower should clearly state the repossession norms. In fact all the NBFCs are directed to include certain clause on repossession of asset in their loan agreement.

RBI said that the clause should state the possibility and terms of repossession of the asset explicitly. Further it should also specify the notice period before taking the asset into possession and the circumstances under which the notice period can be waived.

Moreover to avoid further confusion, procedure for taking possession of the security, provision regarding final chance to be given to the borrower for repayment of the loans before the sale or auction of the asset, procedure for giving repossession to the borrower and the procedure for sale or auction of the asset should also be mentioned in the loan agreement.

As a result of RBI's approval, credit flow is expected to rise in the country. Earlier as there had been strict norms regarding repossession of asset, lenders were going slow and extending finance to the selected borrowers. "Allowing us to repossess assets in case of default will encourage us to lend more," said Mr R. Sridhar, Managing Director, Shriram Transport Finance Company.

Chairman of Finance Industry Development Council, Mr T.T. Srinivasa Raghavan said, "This is a shot in the arm for asset financing companies."

RBI agreed for the repossession because FIDC was able to explain the difference between ‘recovery' and ‘repossession' to the central bank, said Mr. Sridhar.

Recovery of an asset sometimes includes harassing the borrower but repossession means only taking back the asset.