Building declared a slum, bank sells razed flat...

Nauzer Bharucha

This could well be Part II of the Bollywood comedy
Khosla Ka Ghosla about a middle-class man's unbelievable
experiences while trying toget back his property filched
by a conman with powerful connections.

But this one is for real.

Some time ago, a ground-plus-one-storey building
in Goregaon (West), known as Gulmohar Cooperative
Housing Society, was declared a ‘slum' by the Slum
Authority (SRA).

The benefits for the builder redeveloping the property
are not far to seek: a much higher FSI of 4 as against
the FSI of 2 which is granted to a housing society.

Incidentally, there are records which show that the BMC
has been assessing the 50-year-old building for property tax since 1962.

Even as the decision to categorise the building as a slum
was challenged by a 75-year-old resident of Gulmohar
Society in July, came another twist.

The Bank of India recently started
recovery proceedings through the Debt Recovery
Tribunal to auction a tiny flat in the same building.

But the comedy of errors does not end here.
The portion of the building in which the flat
existed has already been demolished by
the builder who is now redeveloping the so-called
slum property.

On Wednesday evening, more than half-a-dozen
professional property traders landed up at the
Debt Recovery Tribunal office at Ballard Estate
to bid for the flat. All of them had promptly given
in their earnest money deposit of Rs 50,000 as part
of the bidding process for a flat which no longer exists.

Even more hilarious—none of them had seen the flat
knew that it had already been demolished.
"I was all set to bid a substantial amount.
, the bid was postponed at the last moment.
It was only then that we realised that the flat
was demolished two months ago,"
said one of the flabbergasted bidders.

When an official in
the asset recovery branch of Bank of India
was asked by one of the bidders about this,
was allegedly told that the highest bidder would only get
"symbolic possession"of the non-existent flat.

In July, the 75-year-old Goregaon resident
of Gulmohar Society, Shobhana Sharadchandra Kulkarni,
had filed a writ petition in the Bombay high court,
challenging the decision of the SRA to declare the
building a slum. The petitioner submitted that
there was a nexus among some members of the housing society,
the builder and the SRA who did this to get the benefits of a much higher FSI.

When the case came up, a bench headed by the
Chief Justice Swatanter Kumar referred the matter
to the state government-appointed slum tribunal.
The petition was subsequently withdrawn.
In the meantime, the builder started demolishing the property.

Meanwhile, Kulkarni's son Sachin has
filed a private complaint with the metropolitan magistrate
in Borivli against committee members of Gulmohar Society,
the builder, the architect and the SRA for the alleged fraud.

The magistrate recently passed an order, directing the
Goregaon police station to investigate the matter and
report to him by October 14.

"Considering the serious allegations and considering
facts and circumstances of the case, it seems necessary
to send this complaint for investigation to the concerned
police station,"said the magistrate's order of August 13.

Auction Sale of Properties by Indian Bank - October 2009

RBI against PPP model for central loan registry

Vrishti Beniwal

The Reserve Bank of India (RBI) has expressed
its reservations on the government’s proposal
to set up a computerised central registry for
keeping records of loans mortgaged against
securities in a public private partnership (PPP) mode.


The banking regulator is of the view that a
government official should head the registry
and that a PPP model will not be suitable
for running it.

The registry, once operationalised, would
help check frauds in the sale and mortgage
of properties by providing details to the
bank or the buyer at the click of a mouse.
“Both the Indian Banks’ Association (IBA)
and the finance ministry are proposing PPP
for the registry. However, RBI has some issues
on the way we want to structure it. So, we have
suggested that it could be a special purpose
vehicle (SPV) headed by a government servant,”
said a senior government official.

IBA’s chief legal advisor MR Umarji said as
the database would be similar to a corporate
registry, private sector participation
would bring in the expertise required to
handle electronic records.

The registry is proposed to be implemented
in two phases. In the first phase, all the
securities of banks will be registered to
help the lenders verify the documents while
giving loans against properties.

In the second phase, the registry
will provide a link to the database
of state governments and municipalities.
A customer planning to buy a house will get
the details about the property by paying a small fee.
Work on the first phase has already started.
And, states like Karnataka, Tamil Nadu,
Andhra Pradesh, Madhya Pradesh and
Maharashtra have even begun computerising
their records in preparation for the second
phase. The concept of a central registry was
introduced in the Section 20-26 of the SARFAESI
(Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest) Act.
The Act came into force in 2002, but the government
has not yet notified the above sections on
establishing the registry.

A central registry is maintained in most
countries.

In India, the absence of such
a registry has led to borrowers taking loans
from other banks using duplicate title deeds.

Also, there have been complaints of banks
losing the deeds and/or not returning the same
in case there is any other loan outstanding.

Banks will soon be in a better position to recover ...

Lenders may tighten stand on defaulters

Banks will soon be in a better position to recover
their dues from defaulters.
The Reserve Bank of India (RBI) and the government have

agreed to give claims by secured lenders priority
over similar claims made by a
state sales tax authority.

The government is also considering an amendment
to the Debt Recovery Tribunal Act or DRT Act, which
will make it necessary for the tribunal to hear the
lenders before it issues a stay order on
attachment of assets.

The government has agreed to amend the Securitisation and
Reconstruction of Financial Assets and
Enforcement of Security Interests
(Sarfaesi) Act and the DRT Act to bring
about these changes, said a person
with knowledge of the matter.

Once the amendments are in place, any secured
lender who disposes assets
of a defaulter will be able to use the proceeds
to settle the loan outstanding.

Currently, the sales tax authorities in states
such as Madhya Pradesh, Maharashtra,
Rajasthan and Kerala have staked a first
claim on the sale proceeds. The amendment
made in the Sarfaesi Act and the DRT will
supersede state laws, thus helping the lenders.

However, to protect the interest of the
sales tax authority, it has been proposed
that the sales tax authority will have
the first right over sale proceeds
if they have made a claim
on the company before the security
was created by the bank.
Banks create a security over
assets at the time of granting
a loan to the company.

“This will not only speed-up the recovery
process but also bring our foreclosure
standards on par with developed nations,”
said AC Mahajan, chairman and
managing director of Canara Bank
commenting on the proposed amendment.

Often when a bank tries to dispose the
assets (of defaulting borrowers),
the sale tax authorities stake first
claim over the sale proceeds.
As a result,
the bank is able to recover just
a small part of its due even though they put
in a lot of effort to recover the money.

The other issue facing lenders was that of
exp-parte hearings. Banks have
complained to the central bank that many
defaulters are obtaining ex-parte
orders which delay the recovery process.

“Recovery efforts through the Sarfaesi Act has
been very successful and it
helped in reducing the level of bad loans.
But at the same time defaulting
borrowers are cornered and they are trying
to find way to delay recovery
process by creating such irritants.
Hence there is a need plug these loopholes
so that a conducive environment is
created for speedy recovery of dues,”
said Mr MR Umarji, former executive
director of the Reserve Bank of India
and now legal advisor to the
Indian Banks’ Association (IBA).

The government has agreed to amend the
recovery act following suggestions
made by IBA relating to the loopholes
in the Sarfaesi Act and the DRT Act.

Till March 2009, under the Sarfaesi Act,
banks have issued 3.41 lakh notices
for an amount of Rs 68,127 crore. Of this
the lenders have recovered
Rs 19,396 crore involving 2.10 lakh notices and while settling

Auction Sale of Properties by Banks - 1st week of October 2009

Basel Norms & Indian Banking System

Amidst globalisation Banking System in India
has attained vital importance.
Day by day there has been increasing
banking complexities in banking transactions,
capital requirements, liquidity, credit and risks associated with them.

The World Trade Organisation (WTO), of which India is a member nation,
requires the countries like India to get their banking systems at par with the
global standards in terms of financial health, safety and transparency,
by implementing the Basel II Norms by 2009.

BASEL COMMITTEE:

The Basel Committee on Banking Supervision provides a forum for regular
cooperation on banking supervisory matters. Its objective is to enhance
understanding of key supervisory issues and improve the quality of banking
supervision worldwide. It seeks to do so by exchanging information on national
supervisory issues, approaches and techniques, with a view to promoting common
understanding. The Committee’s Secretariat is located
at the Bank for International Settlements (BIS) in Basel, Switzerland.

NEED FOR SUCH NORMS:

The first accord by the name .Basel Accord I. was established in 1988
and was implemented by 1992. It was the very first attempt to introduce
the concept of minimum standards of capital adequacy.
Then the second accord by the name Basel Accord II was established
in 1999 with a final directive in 2003 for implementation by 2006 as Basel II Norms.
Unfortunately, India could not fully implement this but, is now gearing
up under the guidance from the Reserve Bank of India to implement it from 1 April, 2009.

Basel II Norms have been introduced to overcome the drawbacks of Basel I Accord.
For Indian Banks, its the need of the hour to buckle-up and practice banking
business at par with global standards and make the banking system in India
more reliable, transparent and safe. These Norms are necessary since India
is and will witness increased capital flows from foreign countries and there
is increasing cross-border economic & financial transactions.

FEATURES OF BASEL II NORMS:

Basel II Norms are considered as the reformed & refined form of Basel I Accord.
The Basel II Norms primarily stress on 3 factors, viz. Capital Adequacy,
Supervisory Review and Market discipline. The Basel Committee calls these
factors as the Three Pillars to manage risks.

Pillar I: Capital Adequacy Requirements:

Under the Basel II Norms, banks should maintain a minimum capital adequacy
requirement of 8% of risk assets. For India, the Reserve Bank of India has mandated
maintaining of 9% minimum capital adequacy requirement. This requirement is
popularly called as Capital Adequacy Ratio (CAR) or Capital to Risk Weighted Assets Ratio (CRAR).

Pillar II: Supervisory Review:

Banks majorly encounter with 3 Risks, viz. Credit, Operational & Market Risks.

Basel II Norms under this Pillar wants to ensure that not only banks have adequate
capital to support all the risks, but also to encourage them to develop and use better
risk management techniques in monitoring and managing their risks.
The process has four key principles:

a) Banks should have a process for assessing their overall capital adequacy
in relation to their risk profile and a strategy for monitoring their capital levels.

b) Supervisors should review and evaluate bank’s internal capital adequacy assessment
and strategies, as well as their ability to monitor and ensure their compliance with regulatory capital ratios.

c) Supervisors should expect banks to operate above the minimum regulatory
capital ratios and should have the ability to require banks to hold capital in excess of the minimum.

d) Supervisors should seek to intervene at an early stage to prevent capital from
falling below minimum level and should require rapid remedial action if capital
is not mentioned or restored.

Pillar III: Market Discipline:

Market discipline imposes banks to conduct their banking business in a safe, sound
and effective manner. Mandatory disclosure requirements on capital, risk exposure
(semiannually or more frequently, if appropriate) are required to be made so that market
participants can assess a bank’s capital adequacy. Qualitative disclosures such as risk
management objectives and policies, definitions etc. may be also published.

CONCLUSION:

Basel II Norms offers a variety of options in addition to the standard
approach to measuring risk. Paves the way for financial institutions to
proactively control risk in their own interest and keep capital requirement low.

But . . .

Requires strategizing risk management for the entire enterprise, building huge
data warehouses, crunching numbers and performing complex calculations
and poses great challenges of compliance for banks and financial institutions.

Increasingly, banks and securities firms
world over are getting their act together.


By: Anand Wadadekar,
M.A Economics, MBA Finance & Banking,
AMFI, DIT, GCIPR

Not Interested-Banks are flush with funds but why are they reluctant to give loans?

Shekhar Ghosh


LAST month, an Aurangabad-based engineering firm
received a query from a Thai export house about
a large consignment of alloy gaskets.

Some three years ago, a spate of similar orders
had forced the company to import brand
new machinery worth Rs 20 crore.

Almost the entire cost was borne
by bank borrowings.
Then came the slowdown in both
export orders and domestic demand:
the company has been unable to repay
even the interest on the loan every year.


Banks need to lend the cash
out for a profit but memories
of bad loans are still fresh and
so they aren't lending.



Instead, working capital loans have risen
further. So last month, when the owner
visited his bank for another Rs 10-crore
working capital loan for the Thai order
which would translate to a roughly Rs 30-crore profit,
the bankers refused. With the Thai economy itself
in doldrums, even the export order could not
be properly trusted. Last week, the promoter
finally informed the Thai company of his
inability to meet the order.

India's corporate backyard is currently
littered with such tales of woe.
"What's worse, you can neither blame
the bankers nor the corporates for
such cul-de-sacs,"
says the executive director
of a nationalised bank.

That there has been a slowdown
in certain sectors of the economy
is well-established. Many corporate
houses—big and small—are finding it
extremely difficult to service their debt.

At the same time, banks are flush with cash.
Deposits have been growing every month.
Over June 1997, deposits increased by
18 per cent in May this year, reaching
a whopping Rs 61,545 crore.

At the same time, bank credit to the
commercial sector is on a decline.
In May, it was only 68.5 per cent of
bank deposits. The 1997-98 bank results
are indeed a cause for worry.
While profits of 29 major banks
have jumped by over 40 per cent,
there isn't much to cheer.
The deposit growth for the banking
industry during 1997-98 was way ahead
of the growth in advances at 15.5 per cent,
according to figures released by the RBI.

Indeed, the pressure on spreads for the
banks—the difference between interest
earned on loans by banks and interest paid
on deposits—has been increasing.

In all cases, spreads declined last fiscal
year or, at best, remained stagnant as banks
competed to attract short-term deposits.
By reducing the interest rates and the
cash reserve ratio, the RBI has put
further pressure on banks.

They had to slash lending rates
following an increase in liquidity,
but could not reduce deposit rates for
fear of losing customers.


Says Rajiv Verma, banking analyst at W.I. Carr:
"The structure of Indian banking is such
that spreads come under pressure when
the rates drop. SBI has been the most
vulnerable in this matter because of
the large proportion of long-term deposits
which it has not been able to re-price,
despite falling lending rates."

It's a strange situation: top-rated companies
can easily borrow from banks, but they have
access to even cheaper alternatives like external
commercial borrowings (ECBs),
private placement and commercial paper,
while small and medium-sized corporates
which need funds most are starved of resources.

These corporates attribute stringent pre-disbursement
conditions set by the financial institutions to be
largely responsible for their inability to get funds
against even those loans that are already sanctioned.


Some banks and institutions also demand promoter's
contribution upto 75 per cent of the project cost.
"If we had that kind of money, we wouldn't
need any loans," says a victim promoter.

The bankers, in turn, blame the history of India's
smaller companies. Explains a consultant to a leading
private bank: "Several companies had overstretched
their capacities expecting a higher rate of economic
growth.

More pertinently, they raised huge
amounts from stockmarkets and banks
to put up large projects.

Many smaller and midsize companies took
the investing public for a ride during the
primary market boom. Promoters are known to
have run away. It would be worse if the
banks did not ensure their commitment."

Today when the bottom has fallen out of
the stockmarket and over 3,000 companies
are trading below or at par, the investing
public is finding it safer to put their money
in banks and earn between 8 and 10 per cent rate
of interest. That's why deposits are growing so fast.

Banks need to lend this cash out to make
a profit, but memories of all those bad
loans are still fresh. And blue-chip companies
with high credit ratings cannot use all the
funds available with the banks either due to the
recessionary environment or because they are
already cash-rich.

Banks are now trying to find novel modes
of investment for their surplus cash.
For instance, overseas money markets,
where returns from short-term instruments
are at least 150-200 basis points (1.5 to 2 per cent)
higher than those on similar domestic instruments.

But as per RBI guidelines, banks can only deploy
funds to the extent of their nostro limits
(non-resident deposits plus the overseas investment
limits which is 15 per cent of the banks'
net worth or US $10 million, whichever is higher).


Says S. Gopalkrishnan, executive director of Bank of India:
"To take advantage of the integration of money,
forex and gilt markets, we have started an
integrated treasury branch. We are also taking
steps to integrate the bank's dealing room worldwide
to have a global treasury in Mumbai."

The government is not unaware of the problems.
One way it is trying to tackle the situation
is by giving banks far greater freedom.


Says K. Kannan,
chairman-cum-managing director
of Bank of Baroda:

"To cut down on bad debts and for the recovery
of loans, the RBI has decided to offer banks a
broad set of directives within which they can
determine an approach for recovery of overdue
loans best suited for the bank."


The finance ministry has already
clarified that there will be no end-use
restrictions on banks wishing to invest
in bonds floated by companies,
even if they are meant for takeover
of companies. Several mergers and
takeovers may now be initiated by banks
themselves.

For example, several mid-size cement
companies which are unable to pay off
their loans are almost expecting their
banks to find a white knight for them.

"Such need-based merger activities prompted
by Indian banks might yet become a trend,
" says Anand Vasudevan, banking analyst
at UTI Securities.

The SBI has also launched the
"general purpose corporate loan",
a normal banking procedure in developed
markets. It has cleared a Rs 200-crore
seven-year loan to ITC for which the end
use is not specified. The interest charged
on such loans will be higher than normal
term loans. However, analysts fear that
even if this becomes a trend, such loans
will only be given to bluest of the blue chips.

This won't solve the problems of the mid-cap
and smaller corporates. Having realised that
the small-scale sector was the worst hit by
the tightening of bank's credit, the RBI had
set up a one-man high-level committee headed
by S.L. Kapur, former secretary in the industry ministry,
to suggest steps for improving the delivery
system and simplification of procedures for
credit to SSIs. While the committee submitted
its report to the RBI on June 30, it was only
last week that the RBI accepted 35 of its
126 recommendations.

Bank branch managers will now have more
power to grant ad hoc limits, and banks
will now be free to decide their own norms
for assessment of credit requirements.


Loan limits have also been raised—application
forms prescribed for loans up to Rs 2 lakh
can now be used for Rs 10 lakh loans and
those for Rs 50 lakh and more can now be used
to ask a loan up to Rs 2 crore.

The central bank has also asked banks to
delegate powers to branch managers to grant
ad hoc facilities to the extent of 20 per cent
of the limits sanctioned.

The most important part of the
recommendations, however, is RBI's circular
to the banks that the flow of credit to SSIs
will now be assessed by using data on
disbursement rather than outstanding balances.

Banks have, therefore, been advised to shore
up their disbursement targets along with their
outstanding balances.

Will all this be enough?


Some are sceptical. For example,
M.S. Verma, chairman, SBI,
who says banking in India in the next
millennium will be very different
from what we have been used to till now:

"By changing procedures and interest rates,
we might get some incremental advantage.
To change the growth rate, we have to
look at strategic issues rather than
procedural ones."

In other words,
response of a totally different order.