Raghuram Rajan's fight against loan defaulters faces first test; SBI-led consortium moves to take control of Sai InfoSystem

Sangita Mehta, ET Bureau | 17 Feb, 2014, 04.13AM IST 

MUMBAI: A key element of Reserve Bank of India governor Raghuram Rajan's plan to cleanse the Indian banking system of bad loans is likely to be tested shortly as lenders take management control of Sai InfoSystem, the biggest defaulter in the information technology sector.

The move, which might otherwise have been tangled in legal issues, has been made easier because promoter Sunil Kakkad is untraceable. A consortium of banks led by the State Bank of India has hired Alvarez & Marsal, a top US firm that specialises in recovery from defaults and supplies management to companies in distress.

State Bank of India, IDBI Bank,Allahabad Bank, IDBI Bank,Corporation Bank% and State Bank of Bikaner & Jaipur have lent close to Rs 1,200 crore to the Gujarat-based company whose promoter has been absconding since June 2013. All banks have classified the account as a non-performing loan—one where the borrower has stopped paying dues—and classified the promoter as a wilful defaulter.

"The mandate to Alvarez & Marsal is to make maximum possible recovery either by selling assets or revive the unit by bringing professionals on board, or a combination of both," said a senior executive at one of the banks with a large exposure to the company.

Alvarez & Marsal declined to comment on the development, while officials from Sai InfoSystem could not be reached. Two officials from government-owned banks confirmed the development but didn't want to be named.

Rajan has called on bankers to change managements at defaulting companies. "Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise," he had said on September 5 when he took charge as governor, outlining his strategy to restore banks' loan books to health.

FM P Chidambaram and other top government officials have also raised alarm over rising bad debt and said promoters need to be held accountable. Bad loans, most of them at state-owned lenders, rose 38 per cent to Rs 1.28 lakh crore as of September 2013 over the year earlier.

Sai InfoSystem, which has 1,400-1,500 employees, collapsed after bidding aggressively for big-ticket technology mandates from government entities such as Bharat Sanchar Nigam and Brihanmumbai Municipal Corporation and failed to deliver on time.

According to media reports, the promoters are in the US, and employees haven't been paid salaries since June last. The development at Sai InfoSystem is reminiscent of what tookplace at Rajendra Steel in the mid-1990s.

The promoter, the Batras, left the country after realising they would be unable to service debt after expanding aggressively. It took banks 10 years to recover some of the loans by selling moveable properties.

Alvarez & Marsal, with 40 offices across the world, is a turnaround and restructuring specialist with revival mandates such as those of investment banker Lehman Brothers and accounting firm Arthur Andersen.

Cyril Shroff changed the way legal services operate & created the country's largest law firm

DIBYENDU GANGULY, ET Bureau | 14 Feb, 2014, 04.41AM IST 

Scheduled for one hour, our interview withCyril Shroff stretches to one-and-a-half hours and then to two hours, with the photo shoot. If law firms charged newspapers for their managing partner's time, Amarchand & Mangaldas & Suresh A Shroff would have billed us several lakhs.

But if he's concerned about the time we're taking, Shroff shows no signs. Like several other CEOs we've met, he has this uncanny ability to stay focused on the person he's with. "People think we lawyers are only in the business of talking," he says.

"Unsophisticated clients might say, what's the value it that? Only sophisticated clients understand the value and are willing to pay for it as a service." For the past 20 years, ever since he took charge of the firm his grandfather founded in 1917, Shroff has been on a mission to make his clients — and the practice of law in India — more sophisticated.

In the process he's grown what was a boutique firm of 25 lawyers into India's largest law firm, employing over 600 lawyers. By the time the firm's 100th birthday comes around in 2017 (see box: Birthday Party), Shroff expects the firm to have over 1,000 lawyers, with a pan-Indian presence. "I always had a clear vision of what I wanted to do. I want Amarchand to be a national champion, the largest, most influential law firm in the country," he says.

When he first joined the firm under the tutelage of his father in the 1980s, Amarchand's business came from litigation and the young Cyril spent much of his initial years in court. But the period gave him opportunities to travel and visit law firms in the US, Europe, Singapore.

He may not have gained in-depth knowledge of their functioning, but he was certainly floored by their decor. One of Shroff's first big decisions after becoming managing partner was to move his offices out of Dalal Street into the new age spaces coming up in Parel.

"Most firms were not interested in investing in world class office infrastructure at that time. But I believed physical space, IT infrastructure were very important. I wanted to change the mahol of the law firm," he says. In 2002, Amarchand took up a floor in a brand new building in the Piramal Group's Peninsula Corporate Park, which has since been expanded to four floors.

"Most legal firms were then in the Fort area, so it was quite a pioneering move," says Ajay Piramal, who later engaged Amarchand as advisor for his Rs 9,000 crore deal with Vodafone. "One reason Cyril has been able to grow as fast as he has is because he been able to attract talent. He's created a very strong second line of lawyers."

The plush working environment was certainly a lure for bright young lawyers but Amarchand's growth also coincided happily with the establishment of high-grade law schools in the country. At a time when other law firms would only conduct interviews at their headquarters, the firm decided to follow the corporate world's practice of going to business school campuses.

"We were the first to go in for campus recruitment. Amarchand recruited from the very first batch of National Law School Bangalore. We recruited purely on merit, regardless of the individual's background" says Shroff. While the new law schools took care of the supply side, the post-liberalisation economic boom created a huge demand for legal services.

Everyone benefited, Amarchand most of all, since Shroff already had all the systems on go. Lucien Wong, managing partner and chairman of the Board of the Singapore based law firm of Allen & Gledhill has known Shroff for ten years and has worked with him on the Tata-Singapore Airlines deal. He recalls a time when his was the larger of the two firms, with 330 lawyers.

"Today, Amarchand is bigger, since the Indian market has grown. The opportunity was there for all the Indian law firms, but none have grown as fast as Cyril. He's a good lawyer, a clear thinker and a very serious person, focused on his work," he says. Rapid growth of the kind Amarchand has witnessed can be difficult to manage but Shroff has handled it well.

"A professional services organization is very different from a company," he says. "Lawyers are ambitious, high strung, insecure. They need to continuously be inspired with a vision. The circle of people I know personally has become steadily smaller as we've grown, but I still communicate regularly with everyone through town hall meetings." Still, there have been growth pangs, especially in the firms's expansion into new geographies. The practice of law in smaller cities is less sophisticated than it is in Mumbai and Delhi and the firm has had to adjust its expectations to ground realities.

Three years ago, it brought in the Boston Consulting Group as a strategic consultant with a view to putting in place systems and processes commensurate with its growth. The challenge now will be to retain the agility and speed of response that clients say are the hallmark of the firm. ICICI Bank chairman KV Kamath has worked with Shroff for over 15 years and says, "Anything you ask Cyril to do, he gets done at enormous speed. You expect him to say it will take a week, but he says it will be done by tomorrow. He has enormous energy, coupled with a brilliant mind, which makes for a formidable combination."

Kamath first sought Shroff's counsel when ICICI needed advice on documentation on project finance, then a new field. Since then, the firm has been adding new practice areas at the rate of one per year, the latest of which is white collar crime, technology and sports law. Shroff himself remains the firm's leading lawyer for Mergers & Acquisition and says, "We don't give our clients convenient opinions.

Which is why consciously avoid getting too close to our clients. We need to be able to say 'no' when required and maintain independence." Shikha Sharma, managing director of Axis Bank, worked with Shroff in structuring the acquisition on Enam Secturities. "Cyril is the epitome of a trusted advisor," she says. "I can call him at 4 pm on a Sunday just to ask him 'do you think I'm doing the right thing here Cyril?' and I know he'll give me an honest, straightforward, answer. He goes beyond the legalities and understands the real world issues we face."

A lawyer's job is to keep his clients out of trouble (and occasionally get them out of trouble) and Shroff sees himself primarily as the good corporate doctor, who sometimes needs to go beyond the technicalities and give a moral judgement on the issue. "We are the repository of a million corporate secrets which will die with us," he says. "I always tell my clients that their reputation is their greatest asset. If they have a good reputation, they can get out of a dodgy situation as they have the benefit of doubt."

Shroff understated style and general lack of vivacity actually comes in very useful when dealing with corporate clients. GM Rao, founder chairman of the GMR Group has sought Shroff's counsel on numerous occasions, including the drafting of his 'family constition and says, "Cyril possesses tremendous humility, a big asset for a lawyer. He creates trust in stakeholders. We know he will keep things confidential."

Chris Parsons, Partner, Herbert Smith Freehills and Chairman of British firm's India Practice has known Shroff for 14 years and worked with him on Diagio investment inUnited Spirits. More importantly, Parsons is a friend who has attended the marriages of both his son Rishab and daughter Paridhi.

"I've seen the other side of him and he likes to have fun. He likes movies, musicals, Chinese food. He also draws very well and produced a little book of drawings for Paridhi's wedding in Goa." That explains why Shroff insists on concluding our interview with a little musical metaphor. "For me running a law firm is like conducting a orchestra," he says. "You can either produce a symphony or a cacophony. The conductor needs to have, have the musical score in his head and to extract the right music from the musicians with the right mix of intrusion and encouragement".

SBI tweaks recovery model

BL :15 Feb 14

With bad loans surging 27 per cent year-on-year to touch Rs. 67,799 crore towards the end of December, State Bank of India has got into a ‘non-performing asset control’ mode, tweaking its recovery model and setting up committees to check further slippages.

The bank has created four General Manager positions for North, South, East and West to focus more on bad loan recovery.

These officials will be in charge of the stressed assets recovery branches (SARBs) in the circles, said SBI Chairperson, Arundhati Bhattacharya.

“We have also made it easier for the other verticals – Corporate Accounts Group (CAG) and Mid-Corporate Group (MCG) – to migrate all their accounts which need hard recovery measures into Stressed Assets Management Group (SAMG).”

“And with this we hope SAMG will be much more focussed and be able to bring about faster (NPA) resolution,” she said.

Committee approach

India’s largest bank has created various committees to look into stressed assets and accounts that are beginning to show weakness.

“The largest of the committees, the one that looks at the largest loans – those above Rs. 500 crore – is headed by me,” said the SBI chief.

The committees that look at loans between Rs. 100 crore and Rs. 500 crore and between Rs. 50 crore and Rs. 100 crore are headed by Pradeep Kumar, Managing Director (Corporate Banking), and Soundara Kumar, Deputy Managing Director (Stressed Assets Management Group), respectively. The committees that look at loans between Rs. 25 crore and Rs. 50 crore and between Rs. 5 crore and Rs. 25 crore are headed by the heads of circles/verticals and by the General Managersrespectively.

Loans between Rs. 1 crore and Rs. 5 crore will be looked after by Deputy General Managers.

“So, with these committees in place, there are weekly reviews of the accounts. We do an ABC analysis of the ones that require immediate attention and then there is a follow-up on the action points to ensure that the accounts get enough attention, and the chances of their slipping are minimised,” said Bhattacharya.

ABC analysis is an analysis of a range of items that have different levels of importance and should be handled and controlled differently.

(This article was published in the Business Line print edition dated February 15, 2014)

SC collegium withdraws 12 names for Madras HC

 Dhananjay Mahapatra,TNN | Feb 15, 2014, 03.54 AM IST

NEW DELHI: In an unprecedented move, theSupreme Court collegium headed by Chief Justice P Sathasivam on Friday withdrew the 12 names it had recommended to the Centre for appointment as judges in Madras High Court, taking into account the massive controversy it had sparked over the selection criteria. 

The animosity caused by the 12 names was such that during hearing of a petition challenging the selection criteria in Madras HC, a sitting judge of the HC, Justice C S Karnan, walked into the court room and openly sided with the issue raised in the petition. 

Justice Karnan had made an appearance before a division bench of Justice V Dhanapalan and Justice K K Sasidharan which was hearing senior advocate R Gandhi's PIL and said he would file an affidavit describing the selection as unfair. The bench had ordered status quo on appointment. The HC had challenged its own interim order before the Supreme Court. 

At a time when the apex court was seized of the matter on the judicial side, the collegium of three senior-most judges of the Supreme Court headed by Justice Sathasivam decided to withdraw the names and send it back to the chief justice of the high court for reconsideration. 

These names had come to the apex court collegium when Justice R K Agrawal was chief justice of the high court. The collegium based its decision to withdraw the 12 names on two developments - one, there had been unprecedented opposition to the recommendation and second, Justice Agrawal was elevated to the Supreme Court as a judge.

The collegium sent its decision withdrawing the December recommendation to law minister Kapil Sibal on Friday evening and said it had not expressed any opinion on the merits of the selection of the 12 names. 

It said since Justice Agrawal had been elevated as a judge of the Supreme Court, in fairness of the scheme of things, the names should be considered afresh by the new chief justice. 

The Supreme Court on January 13 had stayed the HC's January 8 order directing status quo in the appointment process of the 12 as judges of Madras HC. It had also restrained the HC from proceeding further with the hearing on Gandhi's PIL and asked why it should not be transferred to the SC. 

Appearing for the Madras HC registrar general, who had appealed against the HC order, attorney general G E Vahanvati had said the SC had settled the law on this issue to rule that the suitability of a person to be appointed as judge could not be questioned before the HC or the SC.

The AG had said, "The process is such that it could not be questioned judicially. Judicial review could be undertaken only on two grounds lack of eligibility of a person to be appointed as a judge and lack of proper consultation among the constitutional authorities part of the process of selection of judges." 
Referring to the surprise intervention by a sitting judge of the HC during the proceedings, Vahanvati had said, "It is a serious matter." Of the 12 names recommended earlier for appointment as judges, 10 are practicing advocates and two are from subordinate judiciary. 

Beyond Bad loans :ICRA downgrades United Bank's Tier-II bonds, CDs

BS Reporter  |  Mumbai  February 14, 2014 Last Updated at 00:47 IST
Sharp rise in bad loans, rising losses lead to action

 Rating agency ICRA announced on Thursday a downgrading of United Bank of India (UBI)’s capital bonds (Tier-II) and certificates of deposit (CDs), due to a higher than expected deterioration in asset quality, pressures on margins and profitability.

The ratings have been put on a watch with negative implications, ICRA stated. It cut the rating for lower Tier-II bonds from AA- to A-. The rating for CDs has been downgraded from A1+ to A2+.

ICRA said the revision reflected the considerably higher than expected deterioration in asset quality. Gross non-performing assets (NPAs) rose sharply to 10.82 per cent as on December 30, against 7.52 per cent as on September 30, 2013. The vulnerable portfolio also includes standard restructured advances, 5.25 per cent of the total as on December 31.

The Kolkata-based public sector lender also saw pressure building on its earnings, as it posted a net loss of Rs 1,238 crore in the quarter ended December. It had a loss of Rs 489 crore in the earlier one. Its capital adequacy ratio also declined to 9.01 per cent in December as against 9.48 per cent in September. The Tier-I capital was 5.59 per cent at end-December, down from 6.18 per cent in September.  The government had injected Rs 700 crore as equity in the third quarter.

On February 11, Fitch, another rating agency, warned UBI’s recent losses might result in the state-run lender's capital ratios falling below the regulatory minimum and test the regulator's approach to the Basel-III capital rules. This is likely to be the first such instance within Asia since implementation of the Basel-III framework. It is also important at this time because a number of Indian banks, mostly state-owned, are considering raising of fresh regulatory capital in the international market, due to capital pressures on the sector, the rating agency had said.

ICRA said UBI would continue to post losses, given its large unprovided NPAs (with net NPA of 7.44 per cent as of December) and its higher NPA generation rate, which would further exert pressure on its capitalisation and solvency ratio. The net loss for  April-December 2013 was Rs 1,683 crore, as against a profit of Rs 361 crore a year before.

CRISIL downgrade

In a related development, rating agency CRISIL also downgraded rating for UBI’s Tier-II bonds (under Basel-II norms) from “AA” to “AA-” and Tier-I perpetual bonds from “AA-“ to “A”.

The downgrade on the Tier-II Bonds reflects the continued and higher than expected weakening in United Bank's asset quality and earnings profile, CRISIL said in statement.

ICRA ratings continue to be based on the high likelihood of timely support from the Government of India (GOI). A lack of support from the government could trigger a further downgrade of the rating.  

The ratings have been put on watch with negative implications as ICRA will be closely monitoring what is being done to shore up the bank’s capital.  The amount and timing of support from GOI and the bank’s ability to arrest further losses due to a worsening asset quality would have a critical bearing on its credit profile.

India iron and steel industry worst affected by slowdown NPA mount - ASSOCHAM

Source – Strategic Research Institute 13 Feb 14

According to the Associated Chamber of Commerce and Industry, iron and steel industry was the worst affected by slowdown in the Indian economy and their repayments to banks have seen huge defaults causing non performing assets of banking sector to swell.

ASSOCHAM said that the number of properties and assets mortgaged to the lenders going for auction has increased substantially but due to slowdown there aren’t many takers for these assets. The number of possession notices published in the media has also gone up significantly, reflecting a tremendous stress in the economy.

According to ASSOCHAM, the worst seems to be over and the situation may improve in the fiscal 2014 to 2015, though the improvement may not be dramatic as long as the consumer confidence is restored and the investment cycle gets back on track.

Iron and steel and infrastructure sectors are the largest contributor to NPAs of the public sector banks. Besides, aviation, textiles and mining are also adding to the stressed assets. These 5 sectors together contribute around 24% of total advances of all banks and account for around 51% of their total stressed advances at the end of September 2013.

The possession and the sale notices are issued by banks and other lenders like financial institutions under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. These notices are for the immovable properties mortgaged with the banks.

Mr DS Rawat Secretary General of ASSOCHAM said that “We will urge the banks to avoid publishing pictures of the borrowers since it does no good either to the banks or to the failed borrowers, a large number of whom would have failed to repay the loans for reasons beyond their control.”

Is bad loan menace at United Bank of India a cover-up after serious Lapses ?

ET Now Simran Gil 13 Feb 14

Is the bad loan menance at United Bank of India a cover-up by the bank's management after serious lapses? Sources close to the development say, the report prepared by RBI-appointed forensic audit firm Deloitte suggests serious lapses on the credit appraisal and automated NPAdetection system of the bank. Sources also say that the report suggests that NPAs were not being detected for past two and half to three years. 

A senior banker in the know says, "the automated system that detects NPAs was found switched off, whether it was intentional or by mistake remains a big question." TheReserve Bank of India had appointed Deloitte to conduct a forensic audit on the bank. 

United Bank of India sent shock waves across the banking sector when it reported gross NPAs at 10.89% in Q3, increasing its bad loans by nearly three times. However, sources in both the government and RBI maintain that the situation at United Bank of India does not pose a systemic risk. The bank has also been instructed to focus primarily on debt recovery and avoid any fresh loans especially on the corporate side. 

Though the bank is dire need of capital, sources indicate that the government will not be in a position to infuse funds immediately, and this will most likely have to wait till the new fiscal starts. 

UBI posted a net loss of 1238 crore rupees in Q3 compared with 42 cr net profit a year ago. Serious questions have also been raised on the bank's capital position. The bank's tier 1 capital has fallen to 5.6% as of Dec, 2013, which is below the minimum capital ratio stipulated by the RBI 

Even in the past questions have been raised on the governance practices at public sector banks. Sources indicate that the RBI had requested the government to appoint a committee on the same, following which PJ Nayak committee to review the governance of bank boards in India was set up in January this year. 

Calls to United Bank of India's CMD by ET NOW remained unanswered.