Saturday, February 4, 2012

Are Young People Too Afraid of Debt?

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Source ::Time :Dan Kadlec : February 2, 2012

Following the Great Recession many young people have become not merely respectful of debt, as we would wish; but fearful of it, which could set them back.



Is debt bad?


 A.P. Giannini, who popularized the home mortgage a century ago and later founded the Bank of America, didn’t think so.


 Neither have the countless working-class borrowers who over 100 years have been able to get ahead faster and live better because of Giannini’s breakthrough product: the consumer loan.


Yet in today’s economy it seems more folks have gotten behind, not ahead, through easy access to credit. In a recent poll, 40 million Americans said they were feeling serious stress over the money they owe on their credit cards, house, or car. Something went haywire. Kids have seen the carnage, and now many young people have become not merely respectful of debt, as we would wish, but fearful of it, which could hurt them in the long run.


Certainly, fear of debt encourages sound practices like paying with cash, paying off credit card balances every month, living within your means and keeping borrowing to a minimum. All good stuff. Part of managing debt is eliminating it in due course. But should you avoid debt at all costs? That might be going too far. There is nothing wrong with the smart use of credit to reach a goal like home ownership or a college education.


Patricia Seaman, director of marketing and communications for the National Endowment for Financial Education, worries that recent experience has left many young people with a warped understanding. “The main message is that borrowing gets you in trouble,” she told Fox Business. “It’s not a complete picture, but that’s what teens have picked up.”


So, for example, at a time when young adults with careers probably should be eager to set up new households, they are instead renting or living with Mom and Dad. Real estate is more affordable than it’s been in many years. Some troubled markets still look like a risk. But many are stabilizing. Goldman Sachs predicts the housing market is hitting bottom and will rise 30% over the next decade. Interest rates are mind-bendingly low. Yet the young fear a mortgage. Debt. Bad.


There’s been no shortfall in borrowing for college; student loan balances are pushing toward $1 trillion. Still, fearful of the indebtedness that often comes with higher education, some now argue that college should be avoided. Yes, it’s high time to bring sanity to the student debt explosion, as President Obama has pledged. Students need to be smarter about how much they borrow and what degree they pursue with borrowed money. But in general you’re better off with a degree than without one even if it means getting a loan. Graduating typically is worth hundreds of thousands of extra dollars in lifetime earnings.


I’m all for careful debt management and a debt-free existence as soon as it makes sense. But most individuals will need to borrow at some point in their life, or risk short-changing their future. Rather than give kids the impression that all debt is bad, we should help them differentiate between good debt and bad debt, and to understand how debt works.




Palpap Ichinichi Software ... vs M/S. Indian Bank







Madras High Court
M/S. Palpap Ichinichi Software ... vs M/S. Indian Bank on 16 September, 2011
Dated : 16.09.2011
Coram :
The Hon'ble Mr.Justice D.MURUGESAN
and
The Hon'ble Mr.Justice K.K.SASIDHARAN
W.P.No.21987 OF 2010
and M.P.No. 1 of 2010
M/s. Palpap Ichinichi Software International Limited
Rep.by its CMD P. Senthilkumar
Door No.3-7, G.S.T. Road
St. Thomas Mount
Chennai-600 016. .. Petitioner
-vs-
M/s. Indian Bank
Rep.by its Authorised Officer
ARM Branch, 4th Floor
55, Ethiraj Salai
Chennai-600 008. .. Respondent
Prayer: Petition filed under Article 226 of the Constitution of India praying to issue a writ of Certiorarified Mandamus calling for the records of the respondent Bank relating to the notice of intended sale dated 21 April, 2010 under Rule 6(2) and 8(6) of the Security Interest (Enforcement) Rules, 2002 under the SARFAESI Act, 2002, fixing the date of auction on 26 May 2010 by notice dated 21April, 2010 and quash the consequential proceedings in notice dated 21 April, 2010 and set aside the sale dated 9 July, 2010 of the property to the respondent vide Sale Deed No.1317 of 2010 on the file of SRO Chennai South Joint II, as illegal and void. For Petitioner : Mr.AR.L. Sundaresan
Senior Counsel for
Mr.B. Natarajan
For Respondent : Mr.M. Balachander
* * * * *
O R D E R
K.K.SASIDHARAN, J
Introductory:
This case is a classic example of misuse of the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 by the secured creditor, by purchasing the secured asset in the absence of bidders, after reducing and refixing the market value and upset price, notwithstanding the offer made by two bidders in the earlier auction quoting substantial amount.

2. The petitioner challenges the sale notice dated 21 April, 2010 and the subsequent sale certificate issued in favour of the respondent Bank on 9 July, 2010 on the ground that the Bank deliberately reduced the market value and the upset price of the secured asset for the purpose of snatching away the valuable property for a paltry sum. The Background Facts:

3. The petitioner is a Software Development International Company started in the year, 1997. The petitioner provides services in the Internet, Wireless, ERP and E-Government Technologies for Japanese Companies and Indian Educational Institutions including Anna University, Dr.M.G.R. Medical University, Stanley Medical College, Kilpauk Medical College and JIPMER Medical College at Pondicherry. The petitioner, for the purpose of their business, took financial assistance from the respondent. Since the petitioner company suffered losses on account of general recession, the loan amount was not re-paid as per schedule. This resulted in initiating action by the Bank to recover the amount.

4. The Bank by invoking the provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as "SARFAESI Act") issued a notice under Section 13(2) on 29 November, 2007 claiming a total amount of Rs.4,26,43,519/-. Though the petitioner submitted a reply to the said notice, the Bank took further action by issuing possession notice under Section 13(4) of the Act on 29 January, 2008.

5. The petitioner unsuccessfully challenged the proceedings before the Debts Recovery Tribunal. The Bank in the meantime took steps to auction the property by fixing the reserve price at Rs.3,10,00,000/-. Though the successful bidder offered Rs.3,15,00,000/-, the amount was not paid and as such, the auction was cancelled. Thereafter, the Bank reduced the reserve price from Rs.3,10,00,000/- to Rs.2,42,00,000/-. The auction was thereafter scheduled to be held on 26 May, 2010. There were no bidders. Therefore, the Bank by quoting a sum of Rs.2,42,00,000/- purchase the property. The said auction is challenged in this writ petition.

6. The Bank filed a counter in answer to the contentions raised in the writ petition. The Bank admitted that the property was purchased by quoting the reserve price. According to the Bank, there was no fraud or illegality in the matter of sale and it was a bona fide transaction. The subsequent valuation and fixation of reserve price cannot be termed as arbitrarily.

7. The Bank subsequently filed an additional counter affidavit wherein it was indicated that before taking part in the auction, intimation was given to the petitioner about their intention. Submissions:

8. The learned Senior Counsel for the petitioner contended that the Bank deliberately obtained a fresh valuation certificate indicating a lesser market value and the reserve price was fixed at a still lower price. The low amount was fixed deliberately, as their intention was to purchase the property for a song. No notice was issued to the petitioner before effecting the sale in favour of the Bank. The sale was in violation of first proviso to Rule 9 (2) of the Security Interest (Enforcement) Rules, 2002. According to the learned Senior Counsel the Authorised Officer has no authority to sell the property, in case, he fails to obtain the price higher than the reserve price. It was further contended that in the event of not getting the price higher than the reserve price, the consent of the borrower is absolutely necessary for the purpose of effecting sale at such price.

9. The learned counsel for the Bank justified the sale made in favour of the Bank. According to the learned counsel there were no bidders and as such the Bank took part in the action and purchased the property for the reserve price. It was contended that the Authorised Officer was fully justified in selling the property for the reserve price in view of the first proviso to Rule 9 (2) of the Security Interest (Enforcement) Rules, 2002. It was his further contention that the reserve price was fixed to indicate that the property will not be sold for a lesser price meaning thereby, the property could be sold for the reserve price. Therefore, there is no illegality in the sale. Discussion and conclusion:

10. Though the learned Senior Counsel for the petitioner has taken substantial contentions with regard to the interpretation of Rule 9 and the illegality of the sale in question on account of the same being made for the reserve price without obtaining the consent of the borrower, we are of the view that it is not necessary to consider the said contention, in view of our finding that the sale in favour of the Bank was a malafide exercise of power.

11. The subject property is situated abutting G.S.T. Road which is one of the arterial roads passing through the Chennai International Airport. The property admeasuring 3867 sq.ft. of land and a building having 1860 sq.ft., was used as the office of the I.T.Company. The Bank took possession of the property under Section 13(4) of the SARFAESI Act. The Bank originally obtained a valuation report on 29 January, 2008. The Authorised Valuer fixed the market value of the property at Rs.308.12 lakhs and published the auction notice. The reserve price was fixed at Rs.3,10,00,000/-. The bid submitted by M/s.A.K.R. Viyapaar Limited, Guindy for a sum of Rs.3,15,00,000/- was found to be the highest and as such, the bid was confirmed in their favour on 25 July, 2008. Though the successful bidder was directed to pay the bid amount, no deposit was made. The Authorised Officer on 15 December, 2008 once again directed the successful bidder to pay the amount on or before 22 December, 2008. The file does not contain any indication as to what had happened subsequently.

12. The Authorised Officer thereafter obtained a fresh valuation certificate on 18 April, 2010. In the said valuation report, the market value of the property was shown at Rs.268.69 lakhs. The forced/Distress Sale value was shown at Rs.201.52 lakhs. The Authorised Officer published the sale notice fixing the sale on 26 May, 2010. The reserve price was fixed at Rs.2,42,00,000/-. The Bank submitted their offer quoting Rs.2,42,00,000/-. Since there were no other bidders, the auction was confirmed in favour of the Bank.

13. The core question is whether the sale was conducted in a fair and transparent manner, fixing the fair market value and upset price strictly in accordance with the provisions of SARFAESI Act.

14. The valuation certificate dated 29 January, 2008 shows that the market value of the property was a sum of Rs.308.12 lakhs. Taking into account the said market value, the Authorised Officer fixed the reserve price at Rs.3,10,00,000/-. The successful bidder quoted Rs.3,15,00,000/- followed by a second offer from another bidder for a sum of Rs.3,10,00,000/-. In case the successful bidder failed to pay the bid amount, nothing prevented the Authorised Officer from calling upon the second highest bidder to pay the amount quoted by him. The file produced by the Bank does not contain any material subsequent to 15 December, 2008 to indicate as to what had happened there after. Similarly, there is nothing on record to show that the money deposited by the successful bidder was forfeited on account of his failure to pay the balance amount.

15. The subsequent valuation report was prepared by the very same valuer, who originally issued the valuation report on 29. January, 2008. The second valuation report dated 18 April, 2010 drastically reduced the market value from Rs.308.12 lakhs to 268.69 lakhs. The land value is increasing day by day in and around Chennai. The subject property is situated in a very covetable locality abutting the main road. Though in the original valuation report nothing was mentioned about the distress value, very strangely the subsequent valuation report contains a statement about the forced/distress value and it was fixed at Rs.201.52 lakhs. Strangely the Bank purchased the property by quoting the distress value.

16. When the land value is increasing day by day, it is strange on the part of the Authorised Officer to obtain a valuation report by reducing the market value by about Rs.60 lakhs that too, after a period of two years and one month from the date of issue of earlier valuation report. There is no question of distress sale in a matter like considering the fact that the purchaser is none other than the secured creditor.

17. The counter originally filed by the Bank does not contain any indication that an intimation was given to the petitioner about the decision of the Bank to participate in the public auction to be conducted on 26 May, 2010. It was only by way of additional counter, the Bank has come up with a case that prior intimation was given to the petitioner regarding their participation. Though notice under Section 13(2) and possession notice under Section 13(4) were all sent by registered post, there is nothing on record to indicate that the notice dated 24 May, 2010 intimating the petitioner about the participation of the Bank in the auction was sent by registered post. Therefore, the case now projected in the additional counter affidavit that the petitioner was given prior intimation about the intended participation of the Bank in the auction is clearly an after thought. The records were prepared after filing counter affidavit to appear as if it was only with the knowledge of the petitioner, the Bank participated in the auction.

18. The course of conduct adopted by the Bank clearly gives an indication that the market rate was deliberately reduced in the subsequent valuation report. The forced/distress value was shown only for the purpose of fixing a lesser amount as reserve price. In case there were no bidders during the second auction, the Authorised Officer in all fairness should have postponed the auction. It is not the case of the Bank that several attempts were made earlier to dispose of the property. Given the location of the property, there would be no difficulty to get higher price as indicated in the earlier valuation report.

19. It is true that the there is no provision akin to that of Order XXI Rule 72 of the Code of Civil Procedure in SARFAESI Act dis-entitling the decree holder from participating in the auction without the express permission of Court. However, in a matter like this, when there were no bidders, the Bank should not have knocked down the property for a paltry sum.

20. The petitioner is still liable to pay the balance amount to the Bank, in spite of losing the property.

21. The Bank is a responsible body. The SARFAESI Act gives wide powers to the Bank to take action to recover the amount and for the purpose of such recovery, to take possession of the property and to sell the same, without reference to Court. Therefore the Bank is expected to conduct the procedure in a bona fide manner. The dealings of the Bank should be fair and transparent. When the amount due from the borrower is more than Rs.4 cores, the attempt of the Bank should be to auction the property for the maximum amount and to adjust it towards the dues and in case of any excess amount after meeting the liability, to refund the same to the borrower. By reducing the market value and the reserve price and by purchasing the property for the alleged distress value by the secured creditor themselves, the public sale has become a mockery.

22. The Authorised Officer is none other than the officer of the Bank. The auction was conducted at the premises of the respondent Bank. Admittedly there were no other bidders. In case the Bank was having an idea to purchase the property, they should have given prior intimation to the borrower. The fact that there is no statutory prohibition against the secured creditor taking part in the auction, will not enable them to purchase the property by re-fixing the market price as well as the reserve price and to purchase the property at such reduced rate. This is absolutely not the intention of the law makers while enacting the SARFAESI Act.

23. In Kerala Financial Corpn. v. Vincent Paul, (2011) 4 SCC 171 the Supreme Court found that there were no rules or guidelines framed by the Kerala Financial Corporation for sale of properties. Therefore, the Supreme Court indicated certain guidelines in the matter of sale of properties owned by the Corporation till such formation of rules, guidelines or orders. The relevant norms are extracted below :- "(v) In the matter of sale of public property, the dominant consideration is to secure the best price for the property to be sold. This can be achieved only when there is maximum public participation in the process of sale and everybody has an opportunity of making an offer. It becomes a legal obligation on the part of the authority that property be sold in such a manner that it may fetch the best price. (vi) The essential ingredients of sale are correct valuation report and fixing the reserve price. In case proper valuation has not been made and the reserve price is fixed taking into consideration the inaccurate valuation report, the intending buyers may not come forward treating the property as not worth purchase by them."

24. In Eureka Forbes Ltd., vs. Allahabad Bank and ors. [2010(6) SCC 193], the Supreme Court while considering the concept of public accountability and performance, indicated that the same would apply to the banks as well. The Supreme Court observed :- "82. Principle of public accountability is applicable to such officers/officials with all its vigour. Greater the power to decide, higher is the responsibility to be just and fair. The dimensions of administrative law permit judicial intervention in decisions, though of administrative nature, but are ex facie discriminatory. The adverse impact of lack of probity in discharge of public duties can result in varied defects not only in the decision-making process but in the decision as well. Every public officer is accountable for its decision and actions to the public in the larger interest and to the State administration in its governance."

25. There is no dispute that judicial review is concerned only with the decision making process. Courts and Tribunals are not expected to sit in appeal over the decisions taken by the authorities including banks. However, when a case of grave miscarriage of justice is made out, necessarily, the Court has to come to the rescue of the affected party. The Court of equity is expected to advance justice. When it is made out that substantial injustice has been done to a party, the Court should not shirk its responsibility. Technicality has no say in such matters.

26. The authority given to the Bank to recover the dues without recourse to legal proceedings will not give them the right to snatch away the property from the borrower. The very fact that in spite of the steep rise in land value, the market value was shown at a low rate after a period of about two years itself shows the mala fides in the matter. The subject sale effected by the Authorised Officer of the Bank cannot be treated as a valid public sale. Therefore we are constrained to set aside the sale made in favour of the Bank.

27. The Authorised Officer is directed to issue fresh auction notice and conduct the auction as per statute in a fair and transparent manner, without giving room for complaints.

28. In the upshot, we allow the writ petition. Consequently, the connected MP is closed. No costs.
(D.M.,J.) (K.K.S.,J)
16.09.2011
Index: Yes/No
Internet: Yes/No
Tr/
To
M/s. Indian Bank
Rep.by its Authorised Officer
ARM Branch, 4th Floor
55, Ethiraj Salai
Chennai-600 008.
D.MURUGESAN, J.
and
K.K.SASIDHARAN, J
Tr
Pre-delivery order in
W.P.No. 21987 OF 2010

Tuesday, January 31, 2012

AI debt recast eludes banks




Source :Manojit Saha / Mumbai Jan 31, 2012, 00:40 IST



Bad debt can downgrade rating



Air India’s debt recast plan has hit a deadlock with both the national carrier and banks continuing to stick to their stand even as the regulator has disapproved providing dispensation, thus only compounding the problem.

Following the rejection of initial debt recast plan, SBI Caps — the merchant banking arm of State Bank of India which has the mandate of finalising the plan — had prepared four alternatives, and sought views from banks. All the banks agreed that the most preferred option would be to convert the debt into bonds which can be used for calculating the statutory liquidity ratio (SLR).


Even so, bonds to have SLR status would require the approval of the Reserve Bank of India. Banks preferred this option, as they will not have to take any hit in terms of provisioning, unlike the other alternatives of converting the debt into preference shares or to long-term loans.


The central bank, however, had turned down the proposal to give SLR status to bonds on the ground that it would set a wrong precedent. At this, bankers sought a timely resolution to the imbroglio, lest their entire exposure would slip into non-performing loan category. It would lead to high provisioning that can be the bottomline of banks. With rating agencies already raising a red flag on Indian banks due to rise in bad loans, such a huge amount becoming a non-performing asset (NPA) would leave banks to face with a rating downgrade.

According to rough estimates, if AI loan turns, it will lead to a 1 per cent increase in gross NPA of the Indian banking sector. The gross NPA ratio for the banking sector was at 2.25 per cent in 2010-11. This was lower as compared to the previous year, though it had increased in absolute terms.

In October last year, Moody’s Investors Service downgraded SBI’s financial strength rating based on the banking entity’s capital situation and deteriorating asset quality.

While the RBI rejected the idea of allowing bonds to have SLR status, it also said it might consider giving some leeway in terms of provisioning if the short-term loans were converted to long-term. Banks have to make provisioning if the loans are treated as long term, and interest rate is reduced as the net present value of the loan will fall. While banks are required to make upfront provisioning, RBI said the amount could be amortised over a time.

For the Rs 43,000-crore debt of Air India, there is a proposal to restructure by spending Rs 22,500 crore. A consortium of 26 lenders, with State Bank of India as the lead bank, has exposure to the troubled airline.


Govt makes another bid to save AI from NPA tag


Source :Saurabh Sinha, TNN | Jan 31, 2012, 06.00AM IST


NEW DELHI: The government is making last-ditch efforts to save Air India (AI) from the non-performing asset (NPA) tag. With repayment not forthcoming, Air India has not been able to pay installments to several banks and the 90-day period will be over on Tuesday. 

A senior AI official said the airline would be able to pay the Rs 215 crore as interest to banks in time to avoid being termed an NPA



Aviation secretary Nasim Zaidi is meeting AI CMD Rohit Nandan - the two men trying to preventing AI from shutting down - on Tuesday morning to review the situation. "AI would not default on interest payment to banks this time and, if need be, seek two-three days to make the payment to avoid the NPA tag," the official said. 

When pilots of the erstwhile Indian Airlines went on strike about a fortnight ago to protest non-payment of five months' performance-linked incentive (PLI) and salary, the government had promised to release Rs 150 crore for the airline to enable it to pay two months' PLI to employees. Based on this written assurance, the no-pay, no-work agitation was called off within a day. 




"That money has not come so far. We somehow paid one months' PLI to employees from our internal resources. We are told the promised Rs 150 crore would be released on Tuesday. Out of that, we will pay one more months' PLI and top it up from other resources to pay interest to banks," said the official.

However both AI and ministry officials admit that unless the government infuses a substantial amount of equity into AI, the airline will not be able to chug along like this.