Banks shy away from revealing big defaulters' names

C Unnikrishnan, MUMBAI: Although a Union finance minister had once described the rising non- performing assets (NPA) of nationalised banks as a loot, public sector banks are unwilling to divulge the names of those who have defaulted on huge loans. None of the 25 public sector banks who were asked to name big defaulters under the Right to Information did so. Sixteen of these banks merely gave figures of the outstandings while nine refused to even reply. According to information provided under RTI, the banks have written off over Rs 15,000 crore in the period 2003-2008. The banks reasoned that furnishing the names is not in public interest and is an invasion into the privacy of borrowers. The RTI application was filed by Borivili resident Richie Shoaib Sequeira on the directions of the Bombay high court. Thursday, chief justice Swatanter Kumar and Ajay Khanwilkar, while hearing his PIL, directed that notices be issued to Union of India, RBI and other banks. The court also directed Sequeira to make the state crime investigation department a party to the PIL. The matter will come up for hearing on October 15. At the last hearing, the HC had asked Sequeira to invoke RTI or any other law to gather details from the banks. Sequeira had filed a PIL, saying there has been no strict vigil by the finance ministry and RBI while writing off loans by the banks and the Debts Recovery Tribunal (DRT) had failed to recover the debts. The RBI, finance ministry, law ministry and DRT have said that in their replies they have no records of the write-offs and one-time settlements between the borrowers and banks. The PIL also said that no rules have been framed by the finance ministry while writing off loans by the banks, which smacks of corruption. Some of the banks in their replies have said that the write-off is done in accordance with the guidelines framed by the board of directors. During a debate in the Lok Sabha in 2002, the then finance minister Jaswant Singh had described the NPA menace as a loot. The banks which refused to disclose details about the defaulters include SBI its associates, Union Bank, Bank of Baroda, Central Bank of India, Dena Bank, Andhra Bank, Oriental Bank of Commerce, Syndicate Bank and Indian Overseas Bank. Banks like Corporation Bank, UCO Bank, BoI and Allahabad Bank refused to reply to the RTI questions. The banks mostly approach the DRT, attach assets under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act or go in for a one-time settlement to recover whatever dues they can. The DRT, set up for expeditious adjudication and recovery of debts owed to banks and financial institutions, recovered just 32% of the total outstanding amount in the period 2001-07. In the case of State Bank of Travancore, in the period 2003-2008, of the Rs 10,162 crore claimed by the bank, it has recovered only 15%. Another 50% of the claims is yet to be decided. In the one-time settlement, the bank has forgone another Rs 800 crore. Dena Bank has managed to recover only Rs 725 crore of the Rs 151,85 crore for the period 2003-2008. And the bank has foregone another Rs 950 crore as part of one-time settlement in the period 2006-2008. the case of Oriental Bank of Commerce, the bank has foregone Rs 1353.5 crore in the last four years. Union Bank of India has recovered only Rs 3,261.5 crore of the Rs 7,623 crore in the period 2006-08.

DRT throws out ANZ suit against loan guarantor

The Mumbai Debt Recovery Tribunal (DRT-I) has dismissed a suit filed by the erstwhile ANZ Grindlays Bank (which got merged with Standard Chartered Bank) against an alleged guarantor of a loan.

The Mumbai police followed the DRT ruling — announced on July 15 — and submitted a report on August 27 against the foreign bank for failing to follow laid down procedures while appointing the guarantor.

The case is a landmark one as it sets a precedent for individuals to bring to book financial institutions.

The case had been pending before the Mumbai High Court as well as the DRT for over a decade.

The DRT-I judge dismissed the suit filed by the erstwhile ANZ Grindlays Bank against Surendra Mor for defaulting, by repeatedly failing (on 11 occasions since 2002) to submit original documents related to the loan.

A final date was set for July 7 when the DRT gave the bank a last chance to produce the original documents failing which the suit would be dismissed with costs in Mor’s favour.

Counsel for Standard Chartered, Mahesh Shukla (of Little and Co) who appeared before the DRT told : “We will move an application for restoration of the case before the DRT. The presiding officer (judge) is likely to impose a cost upon us for the default. We will then submit our claim affidavit and compilation of original documents while seeking a restoration of the case.”

Police sub-inspector Vishwas Jatak, who submitted the police report based on the complaint of cheating made by Mor against the bank (a copy of his report is available with , told this paper, “The investigations are complete and I have submitted my report to the deputy commissioner of police Naval Bajaj. It was found that even though Mor was not even an income-tax payee, he was made a guarantor to the loan issued to a third party by ANZ.”

Jatak added that even the terms of the loan (read overdraft facility) offered by the bank were clear that it was extended against a collateral security of shares by the borrower and there was no requirement for the guarantor.

“Moreover, the bank has repeatedly failed to appear before the police, despite repeated oral and written missives sent to them,” the police report said.

Mor, who had been waging a legal battle against the bank, said, “The DRT, which is a fast track forum for banking institutions to recover their outstandings from debtors, has in this instance favoured the individual against the institution. The scheme under which the loan was issued against securities had no requirement for a guarantor but still I was induced to issue a guarantee. Within a fortnight, I revoked it as I came to know that the bank manager was playing some mischief. The people on whose behalf the guarantee was obtained by the bank also denied knowledge of any guarantee which was fraudulently obtained.”

Auction Sale of Properties by banks - 5th week September 2009

Petition in HC wants closure of StanChart's India operations

The Delhi High Court has issued notice to
Standard Chartered Bank on a petition,
which alleged non-payment Rs 1.5 lakh by
the foreign bank as directed by the DRT and
sought winding up of the lender's India operations.

A single member bench of Justice S K Mishra has directed
the foreign bank to file its reply within four weeks on a
petition filed by three persons in a property case.

The petition followed StanChart's alleged failure to pay
a cost of Rs 1.5 lakh to the persons as per the judgement
of the Debt Recovery Tribunal (DRT) in New Delhi.

The DRT in its ruling on May 15 quashed two notices of the
Bank on taking possession of the two properties located in
Nizamuddin West in New Delhi under the Securitisation
and Reconstruction of Financial Assets and Enforcement
of Security Interest Act. The DRT also asked the bank to
pay Rs 1.5 lakh along with 18 per cent interest to the persons.

However, according to the petition filed by advocate
Gajendra Giri, the bank neither paid the amount nor
returned the property papers of his client D S Sawhney's home.

"Standard Chartered Bank has illegally withheld property
documents despite the fact that nothing is due against the
said property and thus bank has cheated them and is
illegally withholding the documents nor it paid the cost
amount as directed by the DRT," contended the petitioner.

Giri contended that as per sections 45 A, 45 B of the Banking
Regulation Act and the Companies Act, if a banking company
fails to pay debt or refuses to pay any lawful demand
"within two working days" then the High Court has
the power to order winding up of the bank.

Auction Sale of Bank Properties - 4th week Sep. '09

Talk to your banker. Don’t rush to DRT

The moment a notice u/s 13(2) of the SRFAESI Act is

received many borrowers act stupidly. Some become sullen.

Some enter into fight with the bank officers. Some rush to

High Court, while others go to the Debts Recovery Tribuanl (DRT).

Some others simply adopt Ostrich policy hoping it is a bad dream

and will go away when they wake up!

Instead the borrower must approach the Bank for help.

When an account becomes NPA initiation of proceedings

under SRFAESI Act is now a days mandatory.

No matter how close the bank manager is with you,

or how so ever sympathetic, he is help less.

The bank manager cannot be faulted for issuing

the notice or taking any of the follow up procedures.

He gets instructions from his seniors who in turn base

their analysis on cold statistics generated by the computers.

As such entering into a fight with the bank manger or his staff is of no use.

Some instances are poignant.

In one case a small time poultry farmer had to cull all

his chicken due to orders of the District Collector.

In another case a blood processing unit had to destroy

its entire stock of processed blood due to orders of health authorities.

Immediate consequence of these events was that these accounts

become defaulting which were otherwise perfectly healthy.

In both the case the bank authorities quickly moved in to secure

their assets even though they knew that the borrower was not

responsible for the situation.

Therefore actions of the bank officers should not

be linked as a personal vendetta by them.

Receipt of a notice u/s 13(2) of the SRAFESI Act

is not the end of the world itself.

You must approach the Banker and discuss the matter with him.

If you have faith you unit you must try to negotiate

restructuring of the debt.

The banker will give you some options for it.

Some of them could be like changing the dates of installments.

Giving a short holiday from repayment.

Reducing the installment amount.

For this you will need to prepare a proper report

with full documentation as to how restructuring

will help you repay the due amounts as well as

revive the unit. You should not expect the Bank

manager to prepare this report for you.

can take the help of experts who will evaluate your assets,

calculate the Return on Investments,

prepare Cash Flow Cycle and other relevant inputs.

Such a report will help the bank manger understand

that there is indeed scope for reviving your unit,

and if necessary he can take orders of his higher ups.

The second option is to go in for infusion of fresh capital.

For this another set of options are available.

It could be the differential value on your collaterals.

It could be like brining in a short term financial partner.

You could also consider some sort of M&A with another related unit.

You could consider some private investors as well.

A number of consulting experts and firms are available

who assist borrowers in this delicate task of bringing in

and selecting a investor.

If nothing succeeds, you must consider

going in for a One Time Settlement Scheme.

Not much should be expected from this Scheme,

but the bankers do have some powers to waive

of some portion of the interest component and

permit payment by installments.

This will substantially alleviate repayment

pains as compared to payment against a decree from Court/ DRT.

The sum and substance is that the borrower

must seek professional and expert advise to tide

over cash crunch cycles and not enter into a fight

his bankers.

This way the existence of the industry can be ensured.

Debt Recovry Concept : An Overview

Most of us and the companies approach Banks and Financial Institutions for loans.

The reason for the loan may differ from person to person and company to company.

All Banks should function in accordance with the guidelines/norms issued by the Banker’s

Bank ‘The Reserve Bank of India’. Subject to the lending norms of Reserve Bank of India,

the banks and financial institutions sanction loans for different purposes.

Though, the Banks and Financial Institutions can lend money even without

security, normally, the Banks and Financial Institutions insist for security

for the repayment of loan. The fixed assets, receivables etc.

can be securities acceptable to the Banks and Financial Institutions

for sanctioning the loans. The loan entitlements, the procedure for

sanctioning the loan, the security issues etc., are exclusively governed

by the guidelines/norms issued by the Reserve Bank of India.

Again, loan, being an agreement or understanding between the

Bank and the borrower, the general laws like Law of Contract,

Transfer of Property Act, Specific Relief Act, Specific Performance etc.,

are applicable to all banking transactions depending upon the nature of transaction.

The prime objective of Bank is to receive deposits and use those deposits

efficiently so as to make money. The Banks will also render certain specific services

on behalf of its customers. The Reserve Bank of India will issue guidelines

and norms considering the policy of the Government too. Exercising control

over flow of money from Banks and Financial Institutions, the Reserve Bank

of India promotes the balanced growth. The Reserve Bank of India can contain

inflation through certain measures and it is a financial measure to contain

inflation as everybody knows.

When a borrower fails to repay the money to the Bank,

what the Bank can do for recovering the loan is to file a civil

suit earlier. We all know the issue of delay in rendering justice

in traditional civil courts and with the inevitable delay,

the Banks could not recover its dues effectively and it resulted

in liquidity problems. Bank pays interest to the deposit holders;

however, the Banks could not make money by using the

deposits as the recovery gets delayed frequently.

This led the government to appoint various

committees for financial sector reforms.

The concentration was on effective recovery

by the Banks and Financial Institutions apart from other things.

Thus, a need has arisen to constitute special tribunals

for recovery of debts by the Banks and Financial Institutions.

The Government has enacted a law called “The Recovery of Debts Due

to Banks and Financial Institutions Act, 1993” under which Debt Recovery

Tribunals were constituted to recover dues by the specified Banks and

Financial Institutions. The RDDBI Act, 1993 provides Banks and

Financial Institutions to approach the Debt Recovery Tribunal

by filing an application for recovering its due. Only when the

amount of due qualifies under the Act, the Banks and Financial

Institutions could approach the Debt Recovery Tribunals under

RDDBI Act, 1993. When the Bank approaches the Tribunal

for recovery, then, the Tribunal will look into the claim made

by the Bank in accordance with the procedure prescribed under

RDDBI Act, 1993 and finally passes an award.

The award can be executed by the Bank.

Despite constituting special Tribunals like Debt Recovery Tribunals

under RDDBI Act, 1993, the Banks could not recover its dues

to the extent expected. This led to further reforms in the

process and curtailing the delay in adjudication.

In furtherance of financial reforms and extending

the object of RDDBI Act, 1993, the Government has enacted

“The Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interest Act, 2002”.

The SARFAESI Act, 2002 is to curtail the delay

in the process of adjudication between the Banks

and its borrowers. The question of recovery by the

Banks and Financial Institutions will arise when the

borrowers commit default in repaying the debt.

When there is default, then, the Banks will categorize

the account as “Non-performing Asset” in accordance

with the norms prescribed by the Reserve Bank of India.

The main difference between RDDBI Act, 1993 and SARFAESI Act, 2002 is as follows:

1. The RDDBI Act, 1993 enables the Bank to approach the Tribunals when the debt exceeds the prescribed limit.

2. Under RDDBI Act, 1993, the Debt Recovery Tribunal will adjudicate the amount due and passes the final award.

3. The SAFAESI Act, 2002 provides a procedure wherein the Bank or Public Financial Institution itself will adjudicate the debt.

Only after adjudication by the Bank, the borrower is given right to prefer an appeal to the Tribunal under SARFAESI Act, 2002.

4. The Banks or Financial Institutions can invoke the provisions of SAFAESI Act, 2002 only in respect of secured assets and not all.

Thus, under SARFAESI Act, 2002, the Banks are given powers under section 13 to carryout the adjudication exercise. The procedure is as follows:

a. The Bank or Financial Institution gives a notice under section 13 (2) to the defaulting borrower whose account was categorized as “NPA”.

b. The borrower who receives the notice under section 13 (2), can send his objections to the Bank’s claim within the time limit.

c. The Bank shall consider the objections and however, it need not pass any order after considering the objections. This enables the Bank to correct itself if it is wrong in the process of adjudication. When the Bank feels that the objections are not tenable, then, the Bank can take possession of the secured asset by issuing a notice under section 13 (4). When it comes to taking possession of the property, there are two things like taking symbolic possession and taking actual possession.

d. Steps under section 13 (4), gives the borrower a right to file an appeal to the Debt Recovery Tribunal under section 17 and further appeal to the Debt Recovery Appeal Tribunal under section 18.

e. Not only the borrower, any person who is aggrieved by the action taken by the Bank under section 13 of the Act, can approach the Tribunal in accordance with the procedure.

f. Initially, the SARFAESI Act, 2002 mandates to deposit certain amount before filing an appeal. The SARFAESI Act, 2002 and its validity was under challenge before the Supreme Court and the Hon’ble Supreme Court has upheld the validity of the Act, however, reduced the amount of deposit to be made before filing an Appeal under section 17.

g. The Bank will sell the secured asset if it is not prevented by any order by the Debt Recovery Tribunal or any competent court.

While it all appears to be simple, there is lot of criticism on this SARFAESI Act, 2002. The criticism is that it is being misused by the Banks and Financial Institutions. In the course, we had to consider the following aspects:

a) Whether a borrower can approach the High Court challenging the action taken by the Bank or Financial Institutions under SARFAESI Act, 2002.

b) Whether it is right to say that the provisions are being misused.

c) Whether the Borrowers’ right to protect the wrong doing is secured and effective remedy is provided.

Answering the first issue is very difficult.

The High Court exercises extraordinary power

under Article 226 of Constitution of India.

Again, the courts say that as the alternative remedy

is available under the Act itself, the High Court will

not have jurisdiction under Article 226 in respect

of SARFAESI proceedings. But, it all depends upon

the facts and circumstances of the Act and there

can’t be any straight answer as to whether the High

Court can be approached questioning the action taken

by the Banks or the Financial Institutions under SARFAESI Act, 2002.

I have seen many cases and at times,

it appears to me that the Act is being misused.

But, it can’t be a justification to say that the Act oppresses

the borrowers. It’s a special and balancing Act with very

good objective and it is to be implemented well.

In view of many transactions and issues, the Banks

and Financial Institutions may commit some mistakes

in the course and it gives rise to the Borrower to approach

the Tribunal seeking stay of proceedings etc.

What happens normally is that, the borrower

gives a request to the Bank seeking to allow him

to settle the account under “One Time Settlement Scheme”.

Depending upon the norms prescribed by the RBI,

the Banks may accept for “One Time Settlement Scheme” or may not.

In many cases, the borrower ignores the Bank

notice under section 13 (2) and then, approaches

the Tribunal when the Bank takes steps to take

possession of the Property and takes step to sell

the same. It is not right. When the notice under

section 13 (2) is received, then, the borrower

has to make detailed objections if any, as otherwise,

his appeal under section 17 of the Act may not sustain normally.

Thus, the borrowers are to be careful

when the Bank exercises its powers under SARFAESI Act, 2002

and with the expert guidance and assistance;

they can protect their rights effectively.

Note:

My intention is to give a brief as to how

to Debt Recovery Laws are to be understood

and complicated issues are not touched at all.


By Bramha Vishnu Mahesh