Do RBI & SEBI prefer firms to close down than to revive them?

The reported warning by Securities Exchange Board of India (SEBI) to mutual fund companies against trying to bail out NPA accounts would be a serious dampener to revive companies that have been declared as NPAs.  While the RBI dictate is already pre-existing, the warning by SEBI is a rather new development.  This would in effect mean that the SEBI and RBI would prefer companies and firms to close down rather than make an attempt to revive them.

The stricter norms to prevent firms and companies, that have been declared as NPAs, from raising funds from any source comes in the wake of Kingfisher fiasco.  It is very unfortunate that Kingfisher case has been taken as bench mark to paint all NPA holders as willful defaulter or fraudulent borrowers.  There are thousands of accounts which have been declared as NPA as per prevailing laws, but the firms are otherwise supported by  strong underlying undervalued or latent collaterals (not the Kingfisher brand type).   This has not only been acknowledged by the Finance Minister on various occasions, but the even the RBI has said something on these lines while handing over a list containing names to top defaulters. 

It is true that Mutual Fund managers may cut sweet deals with unscrupulous NPA firm  owners and leave the Fund and its investors at great risk.  But suitable mechanisms can be put in place to see that adequate due-diligence has been done  and all prudent precautions have been taken before advancing any loan to a firm that has been declared as NPA by a Bank or Financial Institution. 

NPA is a very nebulous concept.  Mere default of 90 days constitutes a NPA.  There are large number of industries where the defaults have arisen due inter-governmental wrangling, non-clearance of projects, temporary cash crunch and  for various transient reasons.  Be that as it may be, no firm has ever been in any business  that has never faced a temporary cash crunch at one point of time or another.  A  prudent economic eco-system must be able to withstand such temporary issues and help sustain  the industrial and commercial environment.  Otherwise, there will be hardly any entrepreneurial  enthusiasm in the country if the Damocles’ sword of NPA on flimsy grounds  constantly dangled on the head of business community. 

Every effort should be made to help revive firms so that they can  come out of the woods and make a meaningful contribution to the country.  Otherwise Make-in-India project may not go very far. For this the  RBI & SEBI must have a clear vision on their part, and which must be communicated clearly down the channels and even the entrepreneurs and professional world should  the boundaries of such refinance, or fresh finance or additional finance or what ever name it may be called. 

Hyderabad DRT Bar Association criticizes  bad loan recovery practices.

That the Banks adopt extremely questionable and unethical practices in their loan recovery procedures is well known. However these are rarely discussed in public domain for fear of being branded either as wilful defaulter or someone who speaks for wilful defaulters. However this seems to be slightly changing in recent times.

At the conference held under the aegis of DRT Hyderabad Bar Association the theme was bad recovery procedures by Banks. The conference was attended by Sr Judge, Justice G. Rohini AP High Court, as well as by Presiding Officer of DRT Hyderabad Shri K. Sai Mohan. 

K. Sai Mohan, Presiding officer of Debts Recovery Tribunal  Hyderabad is reported to have descried the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) as ‘draconian’.   He has advocated that the scope and powers of  the Debts Recovery Tribunal u/s 17 of the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993  should be expanded and it should include suitable directions to banks keeping the need of ‘recovery of dues’ in mind.  He has said that Banks and financial institutions must follow RBI guidelines while classifying the borrowers’ accounts as NPAs.  

Justice G. Rohini, senior judge of AP High Court who also participated in the function is reported to have said that  that Debts Recovery Tribunals  should give a fair opportunity and conduct a fair trial considering various lacunae in the recovery system.    She is also said to have advised bank  to be conscious of the plight of the borrowers while taking possession of residential properties and disposing them, the banks should view the plight of the borrowers.”

No doubt DRTs and DRATs have been constituted for the expeditious recovery of bank dues.  But the hearing should be transparent and fair to both the parties. Recently the Supreme Court lamented on this very point and hoped that the Tribunals  will give a fair trial to alol the parties [Standard Chartered Bank v/s  Dharminder Bhohi and others].  Even within the provisions of the existing Act much can be done to give a feeling of a fair trial to the parties. 

DRTs routinely refuse production of documents from banks on the ground that it is a ploy to delay proceedings.  The same document is however available through the RTI route – but this route takes a long time – some time months, and in the meanwhile DRTs dispose off the cases.

Latches by banks is condoned on the ground that ‘public money’ is involved, but parties are heavily fined even if they move minor applications which is provided under the law.  The only thing is that it has not been examined for. 

There is lot of bitterness among the defendants that they have not been heard properly. The DRT’s are under the administrative jurisdiction of the Ministry of Finance which is the applicant /defendant in all the cases before the DRTs.   That been the case the DRT’s are under enormous pressure to crunch up number of disposals resulting in miscarriage of justice, bitterness and feeling of being unheard by a judicial body. 

The mechanism for filing appeals is very complicated, cumbersome and costly. The DRAT’s are located at five different metropolitan cities far remain from the main land (Mumbai, Calcutta, and Chennai) making parties travel long distance to appear in the matter. 

Why not a NPA security Bill?

Just the way we cannot banish hunger by banishing the hungry, NPA cannot be banished by putting the defaulters in jail. 

It is true that there are  some wilful defaulters and also some of them lacked financial discipline and ought not to have entered entrepreneurial adventures.  But it is wrong to say that all defaulters come in this category.

A large number of defaults have  occurred due to contributory negligence and in some cases of criminal attitude of the bank officials as well –of which we hear now and them in the press.  There are large number of cases where the accounts have become sick because of Government policies or lack of them.  In some cases the accounts have become defaults due to some turmoil in the sector like jewellery or petroleum based units, or sudden devaluation of the rupee, or perhaps their exports got stuck in dangerous political situation in the country of import.  There could be hundreds of such instances.

These entrepreneurs are certainly national assets and should be encouraged and nurtured.  They create jobs and generate taxes and revenues.  Without them India just cannot function.  These are the MSME units who are in danger of becoming extinct soon if not sooner.

The most common refrain amongst banking circles as well as in Government is that bank loan defaulters are national looters and they must be hounded to death.  The gravity of this thinking in Government circles is so extensive that then Finance Minister, just before demitting office to become the President of India, held a conference of  Chairpersons of  Debts Recovery Appellate Tribunals and Presiding Officers of Debts Recovery Tribunals and other such officials and ‘advised’  them to recover bank dues.  A committee is reported to be functioning in the Ministry of Finance which requires senior officers of Debts Recovery Appellate Tribunals and Debts Recovery Tribunal  to appear before them and report on the progress being made in recovery of bank dues.  It is also learnt that this committee is run by some senior officers of bank.  How can justice be expected if the Debts Recovery Appellate Tribunals and Debts Recovery Tribunal  are subject to such immense pressures.  After all they are also human beings.

This is the same attitude the Government adopted in tackling the Naxalite or Maoists.  But the problem of NPA is far more serious issue as it effects the nation as a whole and cannot be confined some remote an inaccessible jungles.

It is therefore absolutely necessary that the NPA be treated as an epidemic.  Debt  restructuring should be rolled out just as food security was rolled in. Without a healthy and vibrant MSME sector the economy is likely to collapse like it happened in some countries in the recent past.

We believe that unless the borrower is a wilful defaulter the banks must necessarily and compulsorily go in for restructuring of the account, whether or not the borrower is able to infuse fresh capital or bring in additional collateral.  After all the default is of just 90 days to categorize the account as NPA,  and the banks already have a margin money  of 25% brought in by the borrower and additionally a buffer of 25%  to 30% on the value of  collateral without taking into account the appreciation in the value of the assets

The banks must also accept the reports given by technical experts as to the viability of the project and not be the appellate authority and reject such reports of experts. 

BankDRT therefore feels that a new provision should be inserted in the SARFAESI Act which makes it mandatory for the banks to go in for Debts Restructuring Scheme (DRS) before issuing a notice u/s 13(2) of the SARFAESI Act. 

We invite readers comments and views on this topic.

Banks told to conduct proper inspection of units

The Ministry of Finance has instructed Banks to conduct proper inspection of units financed by them in order to avoid NPA status.

It is nobody’s secrete the manner in which banks conduct inspection of units financed by them.  Some times the financed parties itself are required to fill up the inspection report and submit in the branches.  The branches however religiously debit the party’s account with inspection charges.  Some times such aimless and mindless  debiting of accounts itself is subject matter of intense litigation.

With NPA levels of public sector banks shooting up through the sky the mandarins in the Ministry have suddenly become acutely aware of the small administrative and procedural lapses done by bank branches which could have prevented the NPA.  Thus the micro management of branches by the Government.

Banks are supposed to conduct periodic inspection of units.  The inspection conducted by banks, among others, entails audit of stocks/inventory and receivables; verification of stocks and debtors; and verification of collateral.

The inspection is aimed to ensure that the money lent by them  is being used only for the intended  purpose and not diverted to unrelated activities/businesses. This awareness seems to have become acute after collapse of mega brands like Kingfisher Airlines and Deccan Chronicle Holdings Ltd.

Branch Managers rarely attach much importance to inspection of Units financed by their branches  as they have enough collaterals.  The branch managers have too much of other activities to bother about than go behind the same old client who gives such big presents every Diwali and new Year.

The situation in consortium lending is even worse. Each bank expects the other bank to do a thorough job!   A consortium loan (generally, a big-ticket loan) is extended by two or more banks jointly to a borrower. This helps banks spread the risks and keep the exposure within the permissible limits.  However the increase in NPA and CDR is maximum in this sector only.

The restructured standard asset to gross advances ratio of PSBs stands at 7.1 per cent (5.7 per cent).     The average gross NPAs to gross advances ratio all PSU banks is at 3.4 per cent as on March-end 2013 (from 2.9 per cent as on March-end 2012).   The appears to be so grim that the above figures will look puny when the new figures roll in

It is time the Government puts in a well thought of economic policy in place rather than having a restrictive policy of filing suits against the borrowers and auctioning off the properties.

Chief Judicial Magistrate not competent to seize properties under SARFAESI Act.

CJM is not an authority competent to pass orders under section 14 of the SARFAESI Act. The lenders must approach the Chief Metropolitan Magistrate,  and where Chief Metropolitan Magistrate is not there, then the District Magistrate.

Section 14 of the SARFAESI Act empowers the secured creditor to approach to local Chief Metropolitan Magistrate (CMM) or District Magistrate (DM) and seek assistance for taking possession of the secured assets. The Act provides that on receipt of such request the CMM/DM shall provide assistance.

A point of argument arose as to whether the CMM and Chief Judicial Magistrate (CJM) are interchangeable words, or whether one is exclusive of other and whether CJM is an authority competent under the SARFAESI Act to pass orders under Section 14 of the Act.

The conflict between CMM and CJM became all the more pronounced as some High Courts held that CJM can pass orders under the Section and some other held that CJM is not competent authority under the Section.

The matter reached before full Madurai bench of the Madras High Court.  After examining all the previous judgement  and also the provisions of the the SARFAESI Act  it was held that CJM is not an authority competent to pass orders under section 14 of the SARFAESI Act. The lenders must approach the Chief Metropolitan Magistrate,  and where Chief Metropolitan Magistrate is not there, then the District Magistrate.

[Read full text of the judgment.]

Greedy banks put small borrowers at risk!

Banks that grew too fast to be normal are at highest risk of going bust. These banks promised high returns on the premise of extracting more from the newer suckers coming their way in future. Now that the fabled suckers have become wiser the banks appear to squeeze the small borrower to stay afloat.

We all saw how some banks grew by leaps and bounds drawings gasps of admiration and praise from al the quarters. The share holders demanded more. The bank executives promised the moon and the investors swooned with greed. Huge dreams were spun out of thin air and nothing more. Instead of doing the business of banking these banks banked upon circus antics curiously termed as hedging others called dollar parking. Now that the bubble is all there to see these turned out to be fudging and barking up the wrong the tree!!!

Some Indian banks strongly aligned with these international banks and lost huge sums. Immediately banks lost faith amongst each other and inter bank call market suddenly dried. RBI steps in and infuses huge amount of liquidity to keep the cash market afloat. Despite all these steps credit crisis is there for all of us to see.

The Governments all over the world are doing every thing possible to keep the banks afloat. While in the USA the big ones have been nationalized in the case of some others huge cheap loans are being offered. In all these melee the small borrower is the worst off. He has no where to go for succor. With falling real estate prices banks are eager to get what ever they can from securities through the SRFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests) Act route and go behind the borrower before the Debts Recovery Tribunal (DRT) route for the balance money.

The Government and the RBI should join hands and put a moratorium on debt recovery till the credit crisis and recessionary trends reverses. If huge sums of money can be released to keep the banks afloat, if schemes can be devised to keep the ailing airline industry afloat then why not devise scheme for small borrowers to tide over the present crisis. After all they paid the highest taxes when the going was good.

Financial jurisdiction of DRT does not change with the change of amount adjudicated.

The Debts Recovery Tribunals (DRT) can hear claims of Banks only if the amount claimed is Rs. 10 lakhs and above.  However the DRT will not loose jurisdiction of a case,  if after adjudication the DRT decrees for a amount lesser than Rs. 10 lakhs.

As per the RDB Act DRTs can hear cases where the Bank's claim is Rs. 10 lakhs or above.  This is apart from other conditions, including that of territorial jurisdiction as well the claim being within the meaning "debt" as defined in the Act.  Therefore the DRTs have an elaborate mechanism for "scrutiny" of the applications before they are registered as an "Original Applicaiton".  Once the application filed by the Bank is found to be in accordance with the Act and within the jurisdiction of the DRT, then, and only then  the Registrar  orders the case to be registered.

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