Successfully Surviving through a Crisis

By V S Rama Rao :CMN : FEBRUARY 13, 2012

The survivors of a crisis are in search of ways to avoid any such happening in the future. In order to influence events in one’s favor, one must know what is about to come up. Hence, one must develop and establish early warning mechanisms that will sense non-performance and signal trouble long before a crisis starts. In short ‘developing an early warning mechanism’ will help.

A company is usually smarter and more experienced after it has encountered a crisis. The company might have been temporarily weakened by the experience, or it might have been reduced in size. But, on the whole the crisis tends to incorporate a team spirit among the people of the organization. It is because they have faced a common enemy and have learned to fight side by side. They have learned to handle adversity and stage a come back. There is no more important formula for succeeding in business than a strong leader backed by a loyal, inspired team. The intelligent manager must notice new competition coming up and initiate actions accordingly.

We have seen the benefits which a crisis can bring about. Now we focus our attention on the effects a crisis can have on the organization, as well as on the parties related to it. All the people involved with the company are affected, more or less. Customers are discouraged to buy the product and sales are affected if the product itself is under attack.

Employees are the worst affected, because they are the people directly concerned with any crisis. Top, executives feel the pressure in social situations. Media can play havoc in covering the whole event.

The creditors and the lending institutions react bitterly to a situation of crisis. They want to know why they were not informed about the problem earlier. Further they demand the details of the steps being taken to overcome the problem.

Suppliers are affected too, as any downward trend in the company’s production and sales would mean a decreased demand for the supplies.

The failure to manage a crisis also affects the public which in turn brings about increased scrutiny by the government and an added burden of regulations.

Managing Crisis:

In short, crisis management consists in handling crisis situations and finding effective solutions to such situation.

Now let us examine the methodology for handling such crisis situations. In the event of crisis, the procedure given below may be followed:

*All the facts about the situation should be gathered. The data may be collected directly by contacting the affected parties, say the workers or the customer, or it can be collected from the available records. This exercise will bring forth the unseen part of the problem. The hidden information will help the management find a solution to the problem.

*The Management should try to gather the facts from various parties who may throw light on the matter. It can also call an emergency meeting of the various parties involved. For example, for a serious marketing problem, a meeting of the Marketing managers (Advertising, marketing Research, sales etc) and sales representatives would be a positive step towards solving the problem.

*The decision taken by the management at this time should be clear and distinct. The decisions have to be convincing if they are to be clear. By understanding the background of the problem the management should identify the real problem and the peripheral problems. The decision should be aimed at the main problem and not the peripheral problems.

*The most important aspect of the crisis management is to communicate the decision properly. This should be done immediately in order to prevent the rumors having their toll. Public address systems and notice boards can prove to be good media for communicating.

*The management should act immediately. Any action thought of should be acted upon without wasting time. Forming of action groups or grievance committees would further worsen the situation. The management should act immediately and come to a decision.

To sum up, the management has to be alert, cool and calm in accepting the situation, gather all relevant facts about the crisis, take clear and distinct decisions, and communicate the decision properly. In other words, the management should be able to understand the situation quickly and take immediate actions.

Indian Bank Vs DRAT Mumbai

Madras High Court

Indian Bank vs Debt Recovery Appellate Tribunal on 16 June, 2010

DATED: 16.6.2010

CORAM:

THE HONOURABLE MR.JUSTICE ELIPE DHARMARAO

AND

THE HONOURABLE MR.JUSTICE M.VENUGOPAL

Writ Petition No.17016 of 2009,

Civil Revision Petition (PD) No.2467 of 2009,

M.P.No.2 of 2009 in W.P.No.17016 of 2009

and

M.P.Nos.1 and 2 of 2009 in CRP (PD) No.2467 of 2009

W.P.No.17016 of 2009:

Indian Bank,

Asset Recovery Management Branch-I,

Wellington Estate,

55, Ethiraj Salai,

Egmore,

chennai-600008. ... Petitioner

Vs.

1.Debt Recovery Appellate Tribunal,

Scindia House,

Narottam Morarjee Marg,

Ballard Estate,

Mumbai-400038.

2.Debt Recovery Appellate Tribunal,

4th Floor, 55 Ethiraj Salai,

Chennai-600008.

3.Parsn Medicinal Plants Private Limited,

now renamed as Parsn Holiday Resorts (P) Limited,

No.22/1 (Old No.33),

Pasumarthy Street, Kodambakkam,

Chennai-600024.

4.Coconut Groves Private Limited,

Now renamed as Coconut Groves

Holiday Resorts (P) Limited,

No.22/1, (Old No.33),

Pasumarthy Street, Kodambakkam,

Chennai-600024.

5.Sandieago Martin

Martin Lottery Agencies Ltd.,

Daizy Plaza No.355 to 359, VI Street,

Gandhipuram,

Coimbatore-12. ... Respondents

C.R.P.(PD) No.2467 of 2009:

Sandieago Martin ... Petitioner

Vs.

1.M/s.Parsn Medicinal Plants (P) Ltd.

2.M/.Coconut Groves Pvt. Ltd.,

Both the companies are

rep.by its Director K.L.Swamy,

New No.22/1 (Old No.33),

Pasumarthy Street,

Kodambakkam,

Chennai-24.

3.Indian Bank,

Assets Recovery Management Branch-II,

55, Wellington Estate, Ethiraj Salai,

Chennai-8 ... Respondents

* * *

Writ Petition No.17016 of 2009 has been filed under Article 226 of the Constitution of India, praying to issue a Writ of Certiorarified Mandamus to call for the records on the file of the respondents 1 and 2 and to quash the impugned order dated 5.8.2009 made in I.A.No.942 of 2009 in S.A.No.359 of 2009 and direct the respondents 1 and 2 not to entertain the appeal in .A.No.359 of 2009 without depositing 50% of the amount due from the respondents 3 and 4. Civil Revision Petition (PD) No.2467 of 2009 has been filed under Article 227 of the Constitution of India, praying to set aside the order of the Debts Recovery Appellate Tribunal, Mumbai in I.A.No.942 of 2009 in S.A.No.359 of 2009, dated 5.8.2009 [DRAT, Chennai matter].

* * *

For petitioner in : Mr.G.Masilamani,

WP.17016/2009, : Senior Counsel for

who is R.3 in CRP : M/s.King & Patridge

For R.3 & R.4 in : Mr.R.Krishnamoorthy,

W.P. : Senior Counsel for

Mr.Srinath Sridevan

For R.1 & R.2 in : Mr.Habibulla Basha,

CRP. Senior Counsel for

Mr.Srinath Sridevan

For R.5 in W.P., who

is the petitioner in : Mr.R.Srinivas

C.R.P.

* * *

COMMON ORDER

ELIPE DHARMARAO, J.

The legal question that is required to be answered by us in these matters is 'could there be any complete waiver of deposit amount to be made by the borrower/guarantor while preferring an appeal before the Debts Recovery Appellate Tribunal, as contemplated under Section 18(1) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as the 'SARFAESI' Act) and whether credit could be given to the borrower/guarantor as against the amount deposited/paid by the auction purchaser towards the sale price?'

2. The writ petitioner/Bank is the creditor; the respondents 3 and 4 in the writ petition are the guarantors and the 5th respondent in the writ petition, who is the petitioner in the Civil Revision Petition is the auction purchaser. For the sake of convenience and easy reference, the parties are referred to as per their ranking in the writ petition.

3. One late G.Venkateswaran and his wife Mrs.Sujatha Venkateswaran were the shareholders of Sujatha Films Limited, Parsn Medicinal Plants Private Limited now renamed as Parsn Holiday Resorts (P) Limited and Coconut Groves Private Limited, now renamed as Coconut Groves Holiday Resorts (P) Limited. The said Sujatha Films Limited borrowed a sum of Rs.1.50 crores from the Bank and the respondents 3 and 4 mortgaged the properties of an extent of about 72.06 acres of vacant land at Mahabalipuram and also delivered the original title deeds of the property as security for the payment of the loan to the bank. Since the borrower/Sujatha Films Limited failed to repay the amount, the Bank filed an application in O.A.No.552 of 1997 before the Debts Recovery Tribunal No.II, Chennai and the same was subsequently re-numbered as O.A.No.2018 of 2001 and thereafter as O.A.No.81 of 2007 and is pending disposal before the Debts Recovery Tribunal No.III, Chennai. Pending disposal of the said application, the SARFAESI Act came into force and on 30.6.2004, the Bank issued a statutory demand notice under Section 13(2) of the SARFAESI Act to the borrower and guarantors calling upon them to pay the sum of Rs.32,47,05,634.76 together with further interest at the rate of 20.75% p.a. from 30.6.2004 till payment and as the borrower and the guarantors failed to pay the amount within sixty days from the date of receipt of notice, the Bank took possession of immovable property and statutory possession notice dated 4.12.2004 under Section 13(4) of the Act was issued and the statutory possession notice was published in the newspaper on 5.12.2004. On 23.9.2005, the notice of intended sale was sent by the petitioner Bank to the borrower and guarantors and sale notice was published in the newspaper on 2.10.2005. Thereafter, the respondents 3 and 4/guarantors filed an interlocutory application in I.A.No.640 of 2004 in O.A.No.2018 of 2001 before the DRT-II, contending that without withdrawing the original application, no action under the SARFAESI Act could be initiated and by an order dated 10.1.2006, the DRT-II, Chennai had dismissed the said application. Thereafter, the sale notice dated 22.1.2006 was published in the 'Indian Express' and 'Dinamani' and as against the said notice, the respondents 3 and 4/guarantors filed an application before the second respondent/Appellate Tribunal in M.A.No.332 of 2006,in which no stay was granted.

4. At this stage, the respondents 3 and 4/guarantors filed a writ petition in W.P.No.5695 of 2006 before this Court, for a Writ of Mandamus that the petitioner Bank should not invoke Section 13(4) of the Act without seeking permission under Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (Act 51/1993) and the said writ petition was dismissed by this Court 1.3.2006, as against which the respondents 3 and 4/guarantors have filed SLP.Nos.5177 and 5179 of 2006 before the Honourable Apex Court and the same were also dismissed by the Honourable Apex Court on 31.3.2006. Subsequently, the respondents 3 and 4 filed an appeal in S.A.No.23 of 2006 in DRT-II, Chennai under Section 13(4) of the SARFAESI Act, challenging the statutory possession notice issued by the Bank under Section 13(4) of the SARFAESI Act, contending that without withdrawing the original application filed before the Tribunal, the Bank is not entitled to proceed under the SARFAESI Act. It is seen that after hearing the arguments, the DRT reserved the orders in the said matter on 25.7.2006. Thereafter, the respondents 3 and 4 filed I.A.Nos.374 and 375 of 2006 to reopen the appeal and to raise additional grounds, contending that after receipt of the Adangal Extract dated 7.8.2006, they came to know that the property mortgaged is an agricultural land and hence SARFAESI Act is not applicable to their case. On 13.12.2006, the DRT-II, Chennai dismissed S.A.No.23 of 2006 and also dismissed the above said two interlocutory applications.

5. As against the said order dated 13.12.2006 made in S.A.No.23 of 2006, the respondents 3 and 4 filed an appeal before the second respondent/appellate Tribunal and in R.M.A.No.5 of 2007, the second respondent passed an interim order dated 1.2.2007, directing the second respondent to deposit Rs.6.50 crores in three instalments. The first instalment of Rs.2.10 crores had to be deposited on or before 28.2.2007, the second instalment of Rs.2.20 crores on or before 28.3.2007 and the third instalment of Rs.2.20 crores to be deposited on or before 28.4.2007 and the matter was directed to be listed on 1.3.2007 to monitor the compliance of the first instalment of the deposit. Since the said order was not complied with, the appeal was dismissed for default and also for non-compliance of the order on 1.3.2007. On 24.5.2007, the respondents 3 and 4 filed an application in I.N.505 of 2007 in R.M.A.No.5 of 2007 praying to restore the appeal and by an order dated 24.5.2007, the second respondent dismissed the said application. As against the said order dated 24.5.2007 passed by the second respondent, the respondents 3 and 4 filed Civil Revision Petition No.2583 of 2007 before this Court and by an order dated 7.9.2007, this Court has permitted the respondents 3 and 4 to withdraw the appeal in R.M.A.No.5 of 2007, as a result of which the second respondent permitted the respondents 3 and 4 to withdraw their appeal by order dated 20.12.2007. Thereafter, the respondents 3 and 4 filed Review Application No.1 of 2008 in S.A.No.23 of 2006, praying to review the order dated 13.12.2006 passed in S.A.No.23 of 2006, which was dismissed by the DRT-III, in-charge of DRT-II on 26.2.2009. This order was challenged by the respondents 3 and 4 before this Court by filing W.P.No.4686 of 2009 and this Court had dismissed the same by the order dated 26.3.2009. Parallel to the above writ petition, the respondents 3 and 4 also filed an appeal in S.A.No.95 of 2009 against the notice of intended sale dated 26.2.2009 and the DRT-I, Chennai has refused to grant any interim order on 26.3.2009. Thereupon, the property was auctioned on 30.3.2009 and the 5th respondent emerged as successful bidder for a sum of Rs.55.25 crores and he deposited the entire amount and the sale certificate was also issued to him on 7.5.2009. While so, as against the order dated 26.3.2009 made in W.P.No.4686 of 2009 and the order dated 27.3.2009 in S.A.No.95 of 2009, the respondents 3 and 4 filed two Special Leave Petitions in SLP.Nos.7707 and 4329 of 2009 and the Honourable Apex Court dismissed both the said petitions on 8.5.2009. Thereafter, possession was handed over to the 5th respondent by the Bank on 24.7.2009 and title deeds were also handed over to him on 25.7.2009 and the sale certificate was registered on 3.8.2009.

6. As against the order dated 26.2.2009 of DRT-II in R.A.No.1 of 2008, an appeal was filed before the second respondent in S.A.No.359 of 2009 and as against the order passed by the DRT-I, dated 27.3.2009 in S..No.95 of 2009, an appeal was filed before the second respondent in S.A.No.414 of 2009 and in S.A.No.359 of 2009, the respondents 3 and 4 filed an interlocutory application in I.A.No.942 of 2009, seeking waiver of deposit as contemplated in Section 18 of the SARFAESI Act. Since the Chairperson of the second respondent retired on 29.5.2009, the matter was taken up for hearing before the first respondent and by the impugned order dated 5.8.2009, the first respondent/Appellate Tribunal held that the appellants therein/guarantors need not make any deposit to maintain the appeal on the ground that the auction purchaser/the first respondent deposited the entire sale consideration. As against the said order, while the Bank has come forward to file the Writ Petition No.17016 of 2009, the auction purchaser has come forward to file Civil Revision Petition (PD) No.2467 of 2009 and since the issue involved is common, both these matters are heard together and are being disposed of by this common order.

7. On the part of the petitioner Bank and the auction purchaser, it has been argued, in one voice, that the amount paid/deposited by the auction purchaser cannot be adjusted towards the deposit to be made by the borrower/guarantors while preferring the appeal under Section 18(1) of the Act. It has also been argued that there cannot be complete waiver of the deposit, as has been prayed for on the part of the guarantors before the Appellate Tribunal and accepted by the first respondent/Appellate Tribunal. On such arguments, it has been prayed to set aside the order passed by the first respondent/Appellate Tribunal.

8. On the contrary, on the part of the guarantors/respondents 3 and 4, it has been argued that the issue of waiver is a matter completely between the appellants/guarantors and the Appellate Tribunal and no prejudice, whatsoever, has been caused to the Bank so as to knock the doors of this Court and the first respondent/Appellate Tribunal is completely within its bounds in passing the impugned order and would pray to dismiss the writ petition and the civil revision petition.

9. Since the entire controversy is with regard to the waiver of the deposit amount, we shall now extract Section 18 of the SARFAESI Act, which reads as under: "18. Appeal to Appellate Tribunal -

(1) Any person aggrieved, by any order made by the Debts Recovery Tribunal under Section 17, may prefer an appeal along with such fee, as may be prescribed to the Appellate Tribunal within thirty days from the date of receipt of the order of Debts Recovery Tribunal: Provided that different fees may be prescribed for filing an appeal by the borrower or by the person other than the borrower: Provided further that no appeal shall be entertained unless the borrower has deposited with the Appellate Tribunal fifty per cent of the amount of debt due from him, as claimed by the secured creditors or determined by the Debts Recovery Tribunal, whichever is less: Provided also that the Appellate Tribunal may, for the reasons to be recorded in writing, reduce the amount to not less than twenty-five per cent of debt referred to in the second proviso. (2) Save as otherwise provided in this Act, the Appellate Tribunal shall, as far as may be, dispose of the appeal in accordance with the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) and rules made thereunder."

10. The language used in this section is very plain and clear, making it unambiguously clear that any person aggrieved by the order of the Debts Recovery Tribunal passed under Section 17 may prefer appeal to the Debts Recovery Appellate Tribunal by paying necessary fee and second proviso to sub-section (1) makes it clear that no appeal shall be entertained unless the borrower has deposited with the Appellate Tribunal fifty per cent of the amount of debt due from him. However, under third proviso to sub-section (1), power has been given to the Appellate Tribunal to reduce the deposit amount, for the reasons to be recorded in writing, to not less than twenty five per cent of debt referred to in the second proviso. Thus, though a discretionary power has been conferred on the Debts Recovery Appellate Tribunal under third proviso to sub-section (1), the discretion is not an absolute one, but a limited one. While exercising the discretion conferred on it, provided for under third proviso to sub-section (1), the Appellate Tribunal has been mandated not to reduce the deposit amount to not less than twenty five percent of the debt referred to in the second proviso.

11. While such is the legal mandate, in the impugned order, the first respondent/Appellate Tribunal has granted complete waiver of the deposit amount to the appellants/guarantors, which has not been contemplated under law. In the interpretation of statutes, the courts always presume that the legislature inserted every part thereof for a purpose and the legislative intention is that every part of the statute should have effect. The legislature is deemed not to waste its words or to say anything in vain. By an interpretative process, the Court cannot reach a conclusion which makes it impossible for remedies provided for under the law to be worked out. The purposive interpretation requires that any interpretation which is unjust or absurd must be eschewed and the Court must adopt principles of reasonable and harmonious construction in consonance with the avowed statutory purpose. Hence, the impugned order passed by the first respondent/Appellate Tribunal is absolutely bereft of any power granted to it and therefore, the same needs to be set aside.

12. However, on the part of the guarantors it has been argued that the impugned order cannot be branded as an absolute waiver, since the Appellate Tribunal has ordered to give credit of the amount deposited/paid by the auction purchaser to the appellants/guarantors.

13. We are unable to accept this part of the order of the Appellate Tribunal also, since being illegal. As could be seen from Section 18 of the SARFAESI Act, extracted supra, the condition precedent for entertaining any appeal preferred by a 'borrower' is deposit of 50% of the amount of debt due from him, as claimed by the secured creditors or determined by the Debts Recovery Tribunal, whichever is less. But, a power has been granted to the Appellate Tribunal, to reduce the amount to not less than twenty five percent of the debt, for the reasons to be recorded in writing. To understand as to who is the 'borrower', we shall revert back to the definition Section 2 of the SARFAESI Act. Section 2(1)(f) of the SARFAESI Act defines the term 'borrower' in the following terms: "borrower" means any person who has been granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank or financial institution and includes a person who becomes borrower of a securitisation company or reconstruction company consequent upon acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance;"

14. From this definition clause it is clear that the 'borrower' includes the guarantor also. Therefore, it goes without saying that the obligation created on the person who has availed loan from the Bank or the financial institution, under second proviso to Section 18(1) to deposit fifty percent of the amount of debt to avail the appeal remedy before the Appellate Tribunal also applies equally to the guarantor and no difference or distinction could be made between a debtor and a guarantor, while entertaining the appeal under Section 18(1) of the SARFAESI Act. That being the legal situation, we have no hesitation to hold that the first respondent/Appellate Tribunal has committed a gross legal error in ordering to give credit of the amount deposited by the auction purchaser to the guarantor, as the auction purchaser cannot be brought within the fold of 'borrower' defined under the SARFAESI Act. For these reasons, the legal point framed above, is answered against the respondents 3 and 4/guarantors. For all the above discussions held, both the above writ petition and the civil revision petition stand allowed. The order of the first respondent/Appellate Tribunal is set aside as non est in law. All the connected Miscellaneous Petitions are closed. No costs.

Index: Yes

Internet: Yes (E.D.R., J.) (M.V., J.)

Rao 16.6.2010

To

1.Debt Recovery Appellate Tribunal,

Scindia House,

Narottam Morarjee Marg,

Ballard Estate,

Mumbai-400038.

2.Debt Recovery Appellate Tribunal,

4th Floor, 55 Ethiraj Salai,

Chennai-600008.

ELIPE DHARMARAO, J.

AND

M.VENUGOPAL, J.

(Rao)

Pre-delivery

Common order in W.P.No.17016/09

& CRP.PD.2467 of 2009

Banks should ensure person offering guarantee is a close relative of borrower

Source :BL :T S Krishnamurthy :5 Feb 2012


CONTAINING NON-PERFORMING ASSETS

The Reserve Bank of India, in its recent Financial Stability Report, has identified deterioration of asset quality as the highest risk facing banks. The RBI has also highlighted the fact that the year-on-year growth of NPAs (non-performing assets), at 30.5 per cent, was higher than the credit growth at 19.2 per cent.

PERSONAL GUARANTEE

While considering loans on the security of personal guarantees, or on the security of properties belonging to the guarantors, it is prudent to ensure that the person offering the personal guarantee/property is a close relative of the borrower.

If the guarantee/property of a third party not in any way connected with the borrower is to be accepted, it is necessary to inquire why he/she is offering the guarantee/security. Often, the security is offered by third parties for a consideration, and when the guarantee is invoked or the property brought to sale, invariably, there is litigation.

There are innumerable cases in which such third parties plead that while signing the guarantee agreements, they were made to believe that they were signing as mere witnesses or that the property was obtained from them by fraudulent means.

They often go to the extent of pleading that the bank was acting in collusion with the borrower. The onus will be on the banker to prove otherwise. Because of the prolonged litigation, it becomes practically impossible to enforce the guarantee/security.

MORTGAGING PROPERTIES

Banks often advance loans on the strength of personal guarantees without insisting on the mortgaging of properties in the name of either the borrower or the guarantors. This is generally done taking into account the reputation of the borrowers/guarantors.

In the case of corporate advances, banks obtain the personal guarantees of directors of the company without insisting on the mortgage of properties in their names. In such cases, banks compile the statement of assets and liabilities of the borrowers and guarantors.

Often, the description of properties of the borrower/guarantor is sketchy without any details. In such cases, it is almost impossible to attach the properties in case there is a need to initiate recovery proceedings.

It is, therefore, necessary to obtain full details of the property, such as survey number, location, extent, and so on, while compiling such statements. It often happens that the properties have already been disposed of by the time the banks initiate steps for attachment. It is, therefore, worth considering whether a ‘negative lien' letter undertaking not to dispose of the properties during the currency of the advance can be taken.

EDUCATION LOANS

Another major threat looming before the banks is the large number of educational loans which are likely to become NPAs in the near future. In fact, the trend has already been set in many banks.

Most of the educational loans, especially in the below Rs 4 lakh category, are now turning into NPAs. The sanction of such loans in large numbers started sometime during 2003-04.

Since no repayment is envisaged during the tenure of the course and for one year thereafter, such accounts were running as performing assets till now. Now, the repayment obligations have started and if there is a default, the accounts turn into NPAs.

There are practically no norms for granting such loans except that the student should have secured admission to a recognised course in a recognised institution.

REASONS FOR DEFAULT

The reasons for default in these accounts are broadly as follows:

Many students just about manage to pass the exams and are unable to secure gainful employment and repay the loans.

Even brilliant students who gain employment do not inform the banks about their employment and do not repay these loans. Tracing these borrowers becomes a Herculean task and even the parents do not cooperate with the bankers in recovery.

In a few cases, students secure admission in private colleges who collect a portion of the amount without receipt for which bank loan is not available. Students borrow from outsiders for meeting these expenses. These outsiders are not as considerate as banks and repayments to them are taken care of first, leaving bankers in the lurch.

While there can be no two opinions about the spirit behind the instructions — that no one should be deprived of higher education because of financial constraints — such students also should be made to realise what banks are giving loans from public funds and not grants from the Government.

The Government must permit certain safeguards to ensure that some moral obligation is cast on the borrower to repay the loans without in anyway diluting the spirit of the directives.

Banks should be permitted to obtain the personal guarantees of at least the parents so that they will be able to persuade the student to repay the loan.

In addition, some sort of group guarantee can be thought of. A group of three students who are friends can be made to guarantee each other's loan so that each one will ensure that all members of the group repay the loan.

Another safeguard that can be thought of is to instruct the educational institutions to incorporate the fact of the students having taken loans as well as the name of the bank and the branch in the degree certificates/mark-sheets.

It should be made mandatory on the part of employers to deduct the monthly instalments from the salaries of such students and remit them to the bank. This may require some enabling legislation. Legal luminaries may examine this. The Government should also implement stringent punitive measures against institutions collecting money unauthorisedly.

(The author is a retired banker. The views are personal.)

Contempt of court: HC raps IFCI chief and recovery officer of DRT

Source ;Vivek Sinha, Hindustan Times:9 Feb 2012

Troubles for Atul Kumar Rai, the chief executive officer and managing director of state-owned financial institution IFCI (Industrial Finance Corporation of India), are showing no signs of ending.

Two months after a parliamentary committee found irregularities in his appointment, 

 the  Delhi high court has rapped him on contempt of court charges for defiance of the court’s orders.

The order passed on February 6, 2012 by the court further mandates that Rai be present in court on February 24, 2012 when the court pronounces punishment on contempt charges.

“…I hold IFCI Ltd, its CEO and MD Mr Atul Kumar, its assistant general manager (law) Ms Shalini Soni and Mr RK Bansal, recovery officer of DRT (debt recovery tribunal) guilty of contempt of this court for wilful defiance of the direction of this court given on October 8, 2009,” Justice PK Bhasin said in his order.

Rai did not respond to calls, messages and email send by HT.

The case and subsequent court orders relate to the winding up of telecommunications firm Koshika Telecom to which IFCI was a creditor. Before the high court’s order to wind up Koshika, a DRT had already auctioned some of its (Koshika’s) assets and deposited the sales proceeds of Rs 12 crore with IFCI Ltd.

Thereafter, on a report from official liquidator, the court passed an order on October 8, 2009, directing IFCI to remit this money with the official liquidator.

However, IFCI failed to do so and approached the DRT, an authority subordinate to the HC. “IFCI had approached an authority subordinate to this court….for seeking permission to appropriate the sale proceeds of the assets the company (Koshika Telecom),” Judge Bhasin said in his order.

NPA, a multi-headed monster

Source :Business Line :T.S.krishnamurthy:9 Feb 2012


Non-performing asset (NPA) is a multi-headed monster having multiple implications on the performance of banks. An immediate offshoot of rising NPAs is the higher provision required. Once an account is classified as NPA it goes through several phrases requiring progressively higher provisions.


A sub-standard Asset requires a provision of 15 per cent on secured portion and 25 per cent on the unsecured exposure. After 12 months as Sub-Standard Asset, it gets classified as Doubtful Asset 1(DA1) and requires a provision of 25 per cent on secured portion and 100 per cent on the unsecured portion.
Once the account crosses one year as DA1, it becomes Doubtful Asset 2 (DA2-1to 3 years) and requires a provision of 40 per cent on the Secured portion and 100 per cent on the unsecured portion.


Once it crosses three years, it becomes Doubtful Asset3 (DA3) and requires 100 per cent provision irrespective of the availability of security. Unsecured loans such as clean loans, educational loans attract 100 per cent provision even at DA1 stage.


Accounts classified as fraud need not go through all these stages and will require 100 per cent provision as soon as it is classified as NPA. Such provisions have to be made out of the profits of the year thus, eroding the bottom line.


The remedy lies in an effective recovery mechanism and the tightening of sanction and appraisal procedures for which I propose to make some suggestions in addition to the ones I had made in my previous articles.
The prevention and recovery of NPAs also require some banker friendly initiatives by the Government and its agencies.


The judiciary also has a role in the mitigation of banks' hardships by having stringent standards for granting a Stay against the recovery measures initiated by the bank and rejecting frivolous objections raised by the borrowers in the initial stage itself.


A large chunk of NPAs comes from Government-sponsored schemes which are target-oriented and require to be granted without any detailed appraisal and without looking into the viability of the project.


The applications are sponsored by Government agencies like the District Industries Centre or other agencies created for specific schemes. In the case of loans secured by mortgage of immovable properties, the security is created by way of equitable mortgage that is, simple deposit of deposit of title deeds.


This does not require registration and the mortgage charge is transferred under Sec 58(f) of the Transfer of Property Act. Since this is not registered, it does not find a place in the Encumbrance certificates.


There have been several cases where the borrowers have sold the property or mortgaged it to a second lender pleading that the original title deeds have been lost. Even though such a sale/second mortgage a sale is not legally valid, banks have to go through the cumbersome procedure of impleading the buyer of the property in the recovery suit for proving its case.


Some States have introduced a system of registering the memorandum of title deeds. (A simple letter signed by the mortgagor confirming that he had deposited the original title deeds with the Bank with the intention of creating a mortgage).


This attracts Stamp Duty and encounters a lot of resistance from the borrower. Further, many banks have lost substantial amounts because of unscrupulous borrowers resorting to multiple borrowing from different banks on the same immovable property. 


To overcome these problems, a Central Registry has been established by an amendment to the SARFAESI ACT.


All charges (other than pledge) created on properties and assets of borrowers favouring banks and other notified financial institutions shall be registered with a Central Registrar appointed by the Government. This has come into effect from April 1 last year.


While this is a welcome step, which will largely prevent fraudulent transactions of the above nature, the sheer volume of such mortgage transactions makes maintenance of such records a daunting task. Further the task will be complete and effective only when all existing mortgages are recorded in the Central Registry.


At present, there is no provision for this in the Act. The Union Government should take immediate steps to constitute the National Company Law Tribunal and the appellate Tribunal for speedy resolution of the cases involving sick industrial units to avoid delays arising out of referring such cases to BIFR.


Often, banks in their anxiety to prevent slippage resort to restructuring of accounts without looking into the long term viability of the project. This is only a postponement of the inevitable, and such accounts more often than not turn into NPAs at a later date as has happened in the case of accounts restructured during 2008-09.
Finally, as has been pointed out in the Financial Stability Report of RBI, while Indian banks will migrate to Basle III from a position of strength, the new standards may require adjustments in lending behaviour.


As the Deputy Managing Director of SBI has pointed out recently, more rigorous standards of appraisal have to be applied while considering fresh exposures and the vulnerable sectors like power, aviation, textiles and real estate have to be assessed taking into account the competition and rising costs involved.
(The author is a retired banker. The views are personal.)