Microfinance institutions face NPAs, allegations of harassment of clients

Source : Businessline :G. Naga Sridhar:Hyderabad, Oct 13

The asset portfolios of microfinance institutions (MFIs) appear to be under stress with increasing reports about the alleged harassments by the recovery agents in the recent past.

The surge in allegations of harassment by recovery agents and fellow-group members are indications of growing non-performing assets in the industry in general, say experts.

During the last one month, names of many big MFIs were linked with such incidents. In Andhra Pradesh alone, 25 persons committed suicide in the last one month due to harassment from recovery agents/group members, according to a senior official in the Deparment of Rural Development. 

When contacted, Mr Sajeev Viswanathan, Chief Executive Officer of Bhartiya Samruddhi Finance Ltd, the microfinance arm of Basix Group said: “It is true that asset portfolios in the microfinance industry in general are under little stress due to seasonal factors.”

Temporary

Adding that this could be only ‘temporary', Mr Viswanathan denied any harassment of clients by his company in the recent incidents.

According to Prof K. Venkata Narayana, Department of Economics, Kakatiya University, Warangal, the root cause of the problem is high rate of interest and the lack of proper bank credit to microfinance sector.

“Instead of directly providing credit to the self-help groups, commercial banks are lending to MFIs to be treated as priority sector.

“In my University Grants Commission – sponsored study of MFI impact in four districts of Andhra Pradesh, I came across many incidents of harassment of clients on the face of growing defaults,” he said.

The pressure of increasing friction in repayments, however, may not be uniform. “We don't see any pressure on our portfolios. The smaller, less professional MFI could be in some problem,” a senior functionary of SKS Microfinance said.

According to Mr Udai Kumar, Managing Director, Share Microfin, the interest rates are within reasonable limits.

“We are charging 24 per cent after borrowing at an average cost of 13 per cent. The operational costs are at nine per cent. So the margins are very reasonable,” he said.

He sees ‘little trouble' in the repayments because of the ‘talk on MFIs now-a-days' but not due to any problem from the client side.

There are about 2,500 MFIs in the country, out of which only 20 are large. The average interest rate in the industry still remains upward of 28 per cent while there are allegations that it goes over 36 per cent in some cases.

bank auction sale-SBI-31-11-10

Auction Sale- DRT -Chennai

Auction Sale- Chennai DRT

Ex-Miss World settles eviction case with bank

Source :MUMBAI: Hetal Vyas, TNN, Sep 19, 2010, 11.18pm IST






Ex-Miss World Yukta Mookhey has withdrawn the case against Bank of India (BOI) following a settlement with the financial institution.


 The BOI had sought to evict Yukta six years ago from a flat in Lokhandwala complex, Andheri, over a dispute it had with her landlord. 


Mookhey's lawyer informed the division bench of Justice P B Majmudar and Justice Anoop Mohta of the Bombay high court that she had reached a settlement with the bank and wanted to withdraw the case. 


The bank had granted a loan to Harmonics Fabrics Fashions Ltd, which defaulted on its repayment.


 Yukta's landlord, Sanjivani Properties Pvt Ltd, had stood as a guarantor for the company.


 The bank moved the Debt Recovery Tribunal (DRT) against Harmonics and Sanjivani to recover the loan by selling the flat. 


A notice addressed to Sanjivani was pasted on the flat Mookhey was living in, on June 15, 2004. Mookhey then appealed to the DRT for relief. 


She contended that she was in possession of the flat by virtue of the licence created in her favour by Sanjivani in January 2002. She stated that she paid Rs 7.5 lakh to Sanjivani as refundable security deposit. 


Further, that licence was extended for 33 months by an agreement dated December 16, 2002. Mookhey claimed that she was entitled to hold on to the property until the security deposit was refunded. 


However, the DRT dismissed her appeal, following which she approached the Debt Recovery Appellate Tribunal. This appeal too was dismissed on July 11, 2005. 


Mookhey then moved HC in 2005 challenging the appellate tribunal's orde

RBI move to have NPAs sold by banks on credit data records

ARCs may join credit info cos.

Source : Business Line :K. Ram Kumar :Mumbai, Sept. 13,2010

The Reserve Bank of India is considering allowing asset reconstruction companies (ARCs) to take membership of credit information companies (CICs). This is to ensure that the ‘defaulter' status of a borrower continues to be reflected in the records of CICs even after the sale of non-performing loans by banks to ARCs.

If ARCs are allowed to become members of CICs, then it will become well-nigh impossible for defaulters to obtain loans from lenders. The reason: with NPLs getting transferred to their books by virtue of acquisition from banks, the ARCs will take up the responsibility of updating the credit information pertaining to defaulting borrowers.

Continuity in credit information pertaining to defaulting borrowers, whose loans have been sold by banks to ARCs, will ensure that they will not get loans from other lenders – banks, non-banking finance companies (including housing finance companies) and financial institutions, said a senior banker clued in to the development.

“Once an ARC buys a non-performing loan from a bank, the loan ceases to be in the books of the latter. Hence, it is important that information pertaining to the sale of the loan to an ARC as well as the extent of recovery of loan outstanding should get reflected in a CIC's system so that other lenders are in the loop, in case they want to check the borrower's credit history,” said Mr M. R. Umarji, Chief Legal Adviser, Indian Banks' Association.

Credit Information Bureau (India) Ltd, India's only operational CIC which provides details pertaining to credit facilities already availed of by a borrower as well as his payment track record, reportedly moved the RBI to allow ARCs to take membership of CICs. This move comes as banks are increasingly resorting to sale of NPLs to ARCs to clean up their balance sheets.

M J Antony: Stalling loan recovery

The Supreme Court cautions high courts against frequently passing stay orders in economic matters

SOURCE :BUSINESS STD :M J Antony / New Delhi September 08, 2010, 0:34 IST

Banks’ non-performing assets are reported to be rising and are anywhere within range of Rs 31,400 crore. 


There are a number of laws with jaw-breaking names to enable lenders to recover the loans — the Recovery of Debts Due to Banks and Financial Institutions Act 1993, the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act 1993 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002.


However, the ingenuity of wayward borrowers, assisted by counsel adept at finding loopholes, often surpasses the provisions of law. 


Earlier, when the only remedy was through civil courts, the financial institutions could be stymied by delays and repeated appeals. In 1993, two laws were passed to fast-track loan recovery and the debt tribunals were set up



With time, as the Supreme Court observed, the proceedings before the tribunals became “synonymous with those of the regular courts and the lawyers representing the borrowers and defaulters used every possible mechanism and dilatory tactic to impede the expeditious adjudication of such cases” (United Bank of India vs Satyawati Tondon).



The court, in this recent judgment, also blamed the government’s “flawed appointment procedure” for the impasse.


Then came the Securitisation Act of 2002. After long litigation in the Supreme Court, the Act became operative in 2004. Even then, the high courts interfered with its functioning by passing injunctions and interim orders. 


This prompted the Supreme Court to remark that “it is a matter of serious concern that despite repeated pronouncements of this court, the high courts continue to ignore the availability of statutory remedies under the Debt Recovery Act and the Securitisation Act and exercise writ jurisdiction for passing orders which have serious adverse impact on the right of banks and other financial institutions to recover the dues. We hope and trust that the high courts will exercise their discretion in such matters with greater caution, care and circumspection.”


In this case, the bank proceeded against a guarantor of a term loan under the Securitisation Act. She moved the Allahabad High Court pleading that the bank should have taken action against the borrower first before moving to take over her mortgaged property. The bank countered it arguing that she could not move the high court straightaway without approaching the special forums set up for loan recovery.


The high court agreed with the guarantor and restrained the bank from taking over her property. According to the high court, the bank should have proceeded against the borrower and exhausted all the remedies against him and only then could it have proceeded against the guarantor. Therefore, the bank appealed to the Supreme Court and succeeded in vacating the injunction.


It is well-known that the liability of the guarantor and principal debtor is co-extensive and the creditor has the right to proceed against either for recovery of dues. Therefore, the Supreme Court stated that the high court had “completely misdirected itself” by asking the bank to recover the dues from the borrower instead of the surety. The Securitisation Act also gives the creditor this choice.


Secondly, the high court should not ordinarily entertain petitions for injunction when other remedies are available for the aggrieved parties. 


This rule, said the Supreme Court, applied “with greater rigour” in matters involving recovery of taxes, cess, fees, other types of public money and the dues of banks and other financial institutions. “In our view,” the court added, “while dealing with the petitions involving challenge to the action taken for recovery of public dues, the high court must keep in mind that the legislation enacted by Parliament and legislatures for recovery of such dues are a code unto themselves inasmuch as they not only contain comprehensive procedure for recovery of the dues but also envisage constitution of quasi-judicial bodies for redressal of the grievance of any aggrieved person. 


Therefore, in all such cases, the high court must insist that before approaching it, a person must exhaust the remedies available under the relevant statute.”


In another recent judgment involving the Foreign Exchange Management Act, the Supreme Court emphasised this view saying that “when a statutory forum is created by law for redressal of grievance and that too in a fiscal statute, a writ petition should not be entertained ignoring the statutory dispensation.” (Raj Kumar vs Directorate of Enforcement). It admonished the high court again in Modern Industries vs SAIL.


It was these repeated errors made by the high courts that prompted the Supreme Court to warn them that stay orders granted would have “serious adverse impact on the financial health of such institutions and prove detrimental to the economy of the nation”.