SBI may tweak debt-rejig plan for SMEs

Source :Business Line Bureau:Mumbai, Sept. 8,2010

State Bank of India (SBI) is looking to recover about Rs 300 crore of non-performing assets (NPAs) in the small and medium enterprises (SMEs) segment through the one time settlement scheme, said Mr M. K. Nag, Chief General Manager, SME Business Unit, SBI.

SBI's total exposure to the SME sector is about Rs 1 lakh crore and of this, NPAs account for less than Rs 5,000 crore, or a little more than four per cent.

Though the bank had restructured a significant amount of SME loans last year, this year it has not undertaken any restructuring in this segment. About 10-15 per cent of the restructured loans have become NPAs, Mr Nag said.

The bank is yet to take a view on extending the special concessional loan package for SMEs, which ends on September 30.

“We may tweak the scheme,” Mr Nag said.

Under the package, called ‘SME Help', existing customers could avail of term loans for a period of two years at eight per cent interest.

 The bank had also reduced the interest rate on working capital and term loans for all new SME customers with loan requirements up to Rs 5 lakh to 8 per cent, provided they were covered by the Credit Guarantee Fund Trust for Micro and Small Enterprises' guarantee.

Debt recovery process takes too long: Fitch

Source: Business LineBureau:Mumbai, Sept. 5,2010

Indian lenders are able to recover 30-50 per cent of the loan amount taking recourse to recovery-driven and business re-organisation forums. But the time taken to resolve the cases can be reduced, said Fitch Ratings, in a report titled, “India's Insolvency Regime.”

The study looked at both the time take and amount recovered using each of the forums.

According to the report, resolution of bad assets by business re-organisation or debt restructuring (such as Board of Industrial and Financial Reconstruction) has not been uccessful in terms of the amounts recovered and time taken, but legal measures such as Debt Recovery Tribunals (DRT) and use of provisions of SARFAESI Act have yielded better results.

The amounts recovered using SARFAESI Act have broadly been in the range of 30-50 per cent of the amount involved, which is more efficient than recoveries gained by using provisions of Board of Industrial and Financial Reconstruction (BIFR).

But conditions which stipulate that the lender must own 75 per cent of the debt in order to take recourse to the SARFAESI Act still pose a challenge, said Mr Sandeep Singh, Director-Structured Finance, Fitch Ratings.

There could be problems in case of multiple lenders. For instance, the banks may sell their loans to different Asset Recovery Companies, in which case the situation will move from five lenders to five ARCs. Or one bank may wish to take recourse to SARFAESI, but another bank may wish to negotiate with the borrower.

Online system

The time taken by DRTs to issue recovery certificates from the date of filing of the original application by the lender has come down from an average of seven years in the mid 1990s to two -three years, said the report.

 In spite of the reduction in the time taken, the final resolution is hampered by follow-up procedure to identify assets, valuation and the auction of the assets. Introducing an online system may improve the follow-up procedure, the report suggested.

It takes an average of two years for BIFR references to be dismissed. This could delay efforts to recover dues through other forums, the report said.

State Bank of Travancore sets staff targets for recovery

NPA WOES.

Source: Business Line,Vinson Kurian,Thiruvananthapuram, Sept. 10,2010

State Bank of Travancore (SBT) has laid out a roadmap for bringing down by 30 per cent gross non-performing assets from the ‘unprecedented' levels of Rs 918.69 crore as on June 30.

A communication from the Stressed Asset Management Department to employees has set separate milestone targets for September, December and March 2011 in this connection.

Accordingly, gross NPAs would be brought down by Rs 138 crore by September, Rs 230 crore by December and Rs 279 crore to Rs 640 crore by March 2011.

The high NPA level at the end of the first quarter of the current financial year was on account of slippages in certain large value accounts as well as retail accounts in the SME and personal loan segments.

“Apart from the loss of revenue, we need to earmark more amounts from our future profits to make provisions for these accounts.

Provision coverage

“Given the stipulation that such provision coverage should be at least 70 per cent (as against our coverage of 60.17 per cent as on June 31, 2010), you can well imagine the severe impact this will have on our net profit,” the communication said.

It is the duty and responsibility of every member of staff irrespective of his/her rank, cadre or designation to do his/her utmost to reduce substantially the level of the NPA and also prevent further accounts from slipping into that category.

The task as set out in the roadmap is quite daunting but by no means insurmountable. “We are confident that without collective and consistent efforts, we will be able to achieve these goals.”

The department has assessed that if each of the employee of the bank were to recover Rs 3 lakh-worth of NPAs, the goals set will have been met.

GUIDELINES ISSUED

While giving out separate branch/controlling office-specific guidelines, it directed that the endeavour of each employee should be to ensure that there is actual recovery in the NPAs.

All those working in a branch or in a controlling office have to become a member of the NPA recovery team of the respective offices. The others (in the Head Office or in offices and branches with nil NPAs) should voluntarily join branch/controlling office teams to supplement the latter's efforts.

‘Borrowers are duty bound to repay debt’- Supreme Court

SOURCE :Aug, 2010, 05.16AM IST, Sanjay K Singh,ET Bureau


NEW DELHI: Expressing concern over the misuse of legal processes to frustrate the recovery proceedings of banks and financial institutions, the Supreme Court has said that the borrowers are duty bound to repay the due debt and any lapse in this regard will invite serious action.


The court, allowing the plea of appellant Indian Bank, directed the defaulter borrower to deposit Rs 3 crore with the lender, noting that the present case is “ illustrative of how a defaulting borrower can use the court process for frustrating the action initiated by a bank under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, for recovery of its dues”.


A bench comprising justice GS Singhvi and justice AK Ganguly said: “The court cannot lose sight of the fact that the bank is a trustee of public funds. It cannot compromise public interest for benefiting private individuals. Those who take loan and avail financial facilities from the bank are duty bound to repay the amount strictly in accordance with the terms of the contract. Any lapse in such matters has to be viewed seriously and the bank is not only entitled, but also duty bound to recover the amount by adopting all legally-permissible methods.”


The court said: “The parliament enacted the Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) because it was found that legal mechanism available till then was wholly insufficient for the recovery of the outstanding dues of banks and financial institutions.”


In this case, the Indian Bank had sanctioned loan to M/s NS Investments, a Chennai-based partnership firm in 1989 and again in 1991. After some time, the account of the borrower was declared as non-performing asset.


In 1995, M/s Blue Jaggers Estate took over the assets and liabilities of the firm. Since it failed to clear the outstanding dues, the bank filed an application before Debts Recovery Tribunal for recovery of Rs 2,15,38,158 with interest, which is pending.


During its pendency, the parties signed joint memo of compromise on June 23, 2004. The bank agreed to accept an amount of Rs 153.50 lakh towards full and final settlement of its claim against the outstanding due of Rs 661.30 lakh.


The borrower did not pay full amount in terms of the compromise and as a result the bank acquired the right to recover all dues, it signed another compromise with the borrower which undertook to pay the balance amount of Rs 63.50 lakh.
It was not accepted by the bank.



The Tribunal took cognizance of the compromise deeds signed by the parties and observed that the bank is entitled to recover the outstanding dues because the borrower had failed to fulfil its commitment in accordance with the terms of compromise.


The Debts Recovery Appellate Tribunal granted interim stay on recovery proceedings, subject to the condition of deposit of Rs 3 crore.


The borrower then filed a writ petition in the high court for an absolute and unconditional stay of the recovery proceedings. It was dismissed.



Aggrieved, the borrower filed Special Leave Petition in the apex court which was dismissed.



Since the borrower did not comply with the order passed by the Appellate Tribunal, the bank auctioned some of the mortgaged properties for which bids of Rs 5 crore were received.



Thereafter, the borrower filed three applications before the Appellate Tribunal for waiver of the requirement of pre-deposit enshrined in second proviso to Section 18(1) of the Act.



The Appellate Tribunal, however, took suo motu cognizance of the fact that the notice had been issued to the defaulter for recovery of Rs 9,86,25,736.95 and directed them to deposit Rs 4.50 crore.



This enabled the defaulter to indulge in further litigation. It filed another writ petition in the high court for quashing order of the Appellate Tribunal and another petition for issue of a mandamus to the Tribunal to decide its application.



The high court then not only set aside the second interim order of the Appellate Tribunal, but also nullified the earlier conditional interim order by declaring that as a result of the sale of property worth Rs 5 crore, the requirement of deposit of Rs 3 crore stands satisfied. Aggrieved, the bank had come to the apex court.


In the meantime, the bank issued two notices under Section 13(2) of the Act asking the borrower to pay Rs 6,47,21,885 and Rs 9,86,25,736 which, according to the lender became due.


It was objected by the borrower firm. It filed objections under Section 13(3-A) of the Act claiming that during the pendency of the recovery proceedings instituted under DRT Act, the lender cannot invoke the provisions of the act.


It was turned down by the bank and issued notice on July 26, 2007, under Section 13(4) of the Act for taking possession of the mortgaged properties.


Faced with the imminent threat of sale of the mortgaged properties, the borrower filed an application under Section 17 of the Act for quashing the proceedings initiated by the lender bank.


Again, with the sole objective of delaying the legal process, it filed three applications. A writ petition was also filed in the Madras High Court.
 
The petition was referred by the high court to the Tamil Nadu Mediation and Conciliation Centre.
 
It submitted a report incorporating the offer of the borrower to pay interest for the delayed payment of Rs 63.50 lakh. It was not accepted by the bank.

The Tribunal took cognizance of the compromise deeds signed by the parties and observed that the bank is entitled to recover the outstanding dues because the borrower had failed to fulfil its commitment in accordance with the terms of compromise.



The Debts Recovery Appellate Tribunal granted interim stay on recovery proceedings, subject to the condition of deposit of Rs 3 crore.


The borrower then filed a writ petition in the high court for an absolute and unconditional stay of the recovery proceedings. It was dismissed.


Aggrieved, the borrower filed Special Leave Petition in the apex court which was dismissed.


Since the borrower did not comply with the order passed by the Appellate Tribunal, the bank auctioned some of the mortgaged properties for which bids of Rs 5 crore were received.


Thereafter, the borrower filed three applications before the Appellate Tribunal for waiver of the requirement of pre-deposit enshrined in second proviso to Section 18(1) of the Act.


The Appellate Tribunal, however, took suo motu cognizance of the fact that the notice had been issued to the defaulter for recovery of Rs 9,86,25,736.95 and directed them to deposit Rs 4.50 crore.


This enabled the defaulter to indulge in further litigation. It filed another writ petition in the high court for quashing order of the Appellate Tribunal and another petition for issue of a mandamus to the Tribunal to decide its application.

The high court then not only set aside the second interim order of the Appellate Tribunal, but also nullified the earlier conditional interim order by declaring that as a result of the sale of property worth Rs 5 crore, the requirement of deposit of Rs 3 crore stands satisfied. Aggrieved, the bank had come to the apex court.

Tribunal cancels sale certificate of Canara Bank

SOURCE :ARUN KUMAR, TNN, Jun 23, 2010, 03.59am IST

PATNA: In a case pertaining to Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, the Debts Recovery Tribunal, Patna, has found the Canara Bank main branch, Gandhi Maidan, chief manager on wrong side of the law. The petition was filed against bank authorities by one Dinesh Prasad, a resident of Bakarganj Bazaza Lane, for violation of Sarfaesi Act.



According to the tribunal order, Prasad took term loan from the bank in 2002 to purchase the property — now in question — located at shop no. G-23, Govinda Complex, Govind Mitra Road, and made payment to the bank.

 The bank started debiting the interest illegally on monthly basis which resulted into financial crunch and the applicant was overburdened and the bank illegally classified the account as non-productive account on June 30, 2004 without any information to the applicant.


The notice by the bank was served to Prasad in August 2005 and symbolic possession of the property was taken by the bank on December 30, 2005.


On April 27, 2008, the bank published the sale notice in the newspaper. The petitioner filed a petition before the tribunal within stipulated time limit — on June 11, 2008.


During the pendency of the appeal, the bank executed the sale deed in favour of the single bidder for the property, one Damodar Prasad Santhalia, on August 12, 2008 without seeking permission from the tribunal.


The tribunal noted that in this case the fraud was committed by the bank officials and auction purchaser by giving false affidavits and the bank sold the property during pendency of the appeal. The tribunal order with regard to the public auction said the legal obligation of the bank authorities was to secure the best price, but in this case the respondent bank sold the property at a throwaway price to Santhalia.


Allowing the Sarfaesi appeal of Prasad, the tribunal cancelled the sale certificate and confirmation of the sale certificate.






 

Firm fined for challenging judicial officer's order

Source :Shibu Thomas, TNN, Sep 9, 2010, 12.38am IST


MUMBAI: A firm's attempt to challenge the qualification of a judicial officer after he passed an adverse order backfired in the Bombay high court. A division bench of Justice P B Majmudar and Justice Anoop Mohta imposed a fine of Rs 20,000 on the firm Tiger Jewellery India Pvt Ltd (TJIPL). The firm had alleged that the presiding officer of the Debts Recovery Tribunal (DRT), Mumbai, who had passed an order against them, did not have the requisite experience.




The HC did not agree. "The petitioner having lost before the concerned DRT, has tried to take out the present proceedings in which we do not find any substance,'' said the judges. The court said that the judicial officer had to engage an advocate to defend himself and justify his appointment. "In our opinion, this petition is nothing but a vexatious proceeding,'' said the HC and asked the firm to shell out the fine to the parties within two weeks. This follows the recent guidelines by the Supreme Court to impose exemplary costs on persons who file frivolous petitions.



In the present case, proceedings were initiated against TJIPL before the DRT. In June 2009, the presiding officer, Vijay Kumar, rejected TJIPL's plea to keep his case for urgent hearing. Subsequently, TJIPL filed the petition claiming that Kumar was not qualified to head the tribunal as he did not have the requisite qualification of practising as an advocate for seven years.



The Union government pointed out that Kumar belonged to the Indian Legal Service and had enrolled as an advocate in 1978 and represented the Centre in various capacities. He had at least 11 years of practice in various courts. The HC agreed that Kumar was eligible for the post. "It is not necessary that for all these seven years, he should be an actively practising advocate,'' said the court.

Time for some quick action by banks, RBI

Source :M. Sitarama Murty : BusinessLine :16 Aug 2010

The Reserve Bank of India made the first move in raising interest rates and the banks in turn have begun moving both the deposit and loan rates northwards. In a growing economy, the demand for credit will increase, but liquidity may not come under pressure in the near term. Savings too should grow in tandem but not at the same rate, thanks to the inflation that made a dent in the domestic budgets.

The rate movements appear to be fuelling undesirable competition amongst the bankers, a scenario, reminiscent of the unwarranted rate war three years ago. With the busy season still far away, banks have begun offering rates out of tune with their asset-liability management needs. This will only lead to erosion of margins and pressure on profits.

Raising resources

Any effort to pass on the burden to the borrowers would be resisted by looking at alternative ways for raising resources. Some have revived the FD route and before long the CP market would become active. Options of ECB/ FCCBs too are being seriously considered. Some banks reportedly are lobbying with the RBI for sub-Base Rate lending, but the RBI is unlikely to oblige. The banks would be compelled to subscribe to CPs at low rates.

The news on the NPAs front is not encouraging. Export and realty sector are yet to come out fully from the recessionary impact. The SME sector suffered major damage and would not be able to recover easily. The storm has receded, but it will be some more time before complete recovery is seen. The recent European crisis has only added to the anxiety. To reduce the NPAs, banks, perforce, would choose the ‘compromise' route with concomitant sacrifices.

Provisioning on NPAs

The RBI has advised the banks to achieve a level of 70 per cent provisioning on NPAs by September. For the banks at a lower level, it translates into making up for the deficit plus providing 70 per cent for all the new NPAs. Banks already at 70 per cent have to provide 70 per cent for the additions, to maintain the level. This amounts to providing for NPAs at prescribed rates in the normal course and making up for the shortfall by way of a floating provision. In the earlier years, the floating provision was handy as, in lean years and in case of need, banks could use it for making provisions for specific assets. This flexibility is no more available. Banks can only reckon it as tier-II capital. Apart from lack of adequate surpluses this acts as a disincentive. Two major banks have approached the RBI for more time to achieve the 70 per cent norm. Others will follow suit if the outcome is favourable.

Two developments that need urgent and serious consideration are the fresh option given for pension and the raising of the statutory limit for gratuity from Rs 3.5 lakh to Rs 10 lakh. The Indian Banks' Association has sent to the RBI a proposal for amortising this liability over a period of five years, as was done once in the past. The ICAI too has to take a view on this measure. The Income-Tax Department will have to give its nod for deferring the liability. The Basel-II discipline and the need to move over to IFRS do not leave much leeway for manoeuvring.

Though estimates vary widely, the burden could be in the range of Rs 20,000-30,000 crore depending on the number of employees switching over to pension now, their pay range and age profile. Better life expectancy, attractive pension packages and low interest rate regime prompted many to reverse their earlier decision. Banks have been resisting the demand for a second option, but the Government seems to have persuaded them. Add to this the need for setting aside Rs 8,000-10,000 crore for the steep rise in the statutory limit for payment of gratuity. Though it is known to be a consequence of the Sixth Pay Commission, the increase was sudden and steep.

There are no easy options and the banks should be ready to bite the bullet. The huge provisions could drive some banks into red or eat into their reserves, bringing down the capital adequacy, while the business needs and implementation of the Basel-II regime dictate an improvement. For the first quarter, banks have followed different options. Only an urgent resolution of the issue will leave some breathing time to banks to prepare.

Another worry for the banks is to ensure that capital to risk-weighted asset ratio doesn't fall because of the unrated assets in their books which carry higher risk weight and additional capital charge. Save for very large and reputed corporates, at least 75 per cent of the borrowers don't carry an external rating tag by approved agencies. It would be a task to get them agree to and abide by the discipline. Poor ratings in turn should mean stiffer interest rates, but banks may not risk loss of business and would rather sacrifice the risk-based pricing philosophy.

Agriculture advances

The pressure on earnings comes from yet another largely ignored source. Banks with agriculture advances less than 18 per cent of their net bank credit have to invest in Rural Infrastructure Development Fund (RIDF) of Nabard, at interest rates of 3.5 to 5 per cent, depending on the amount of shortfall. Assuming an average return of 7 or 8 per cent on agricultural loans, a whopping loss of three-four per cent on the investments running in to thousands of crores of rupees is a big blow to the banks. The position is relatively comfortable in a few public sector banks while it is difficult in private banks. The interest subvention of the government to the extent of 2 per cent is confined only to the public sector banks and is a clear disincentive amounting to discrimination for the private banks to achieve the bench mark. Farmers naturally prefer to deal with PS banks both for the incentive and a belief that only the ‘sarkari' banks can write-off their loans, at the instance of the government.

Microfinance institutions

The banks falling short on agricultural lending try to make it up partly by buying out at low rates the portfolios of microfinance institutions, that are known to charge to the ultimate borrowers anywhere between 15-24 per cent. This disguised securitisation would encourage more vigorous expansion of the microfinance institutions, some of which have already reached optimum level in terms of geographical spread, number of branches/accounts and ability to monitor and control operations.

Solutions and decisions have to come fast for these problems as hardly eight months are left in this year.

(The author is former Managing Director of State Bank of Mysore. Email: murthy@mandavilli.com)