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”.

Loan waiver to come under tax net in new regime

May create hardships for debt restructuring cases.

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Widening the ambit
Loans waived by lenders will be treated as income in the hands of the borrowers and taxed accordingly
Tax experts are of the view that the clause concerned is quite broad and vague, which could lead to litigation

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Source :Business Line ,K.R. Srivats,New Delhi, Sept.2010

Corporates going in for debt restructuring may face rough weather on the income-tax front when the Direct Taxes Code (DTC) comes into play from April 1, 2012.

This is because the DTC provides that loans waived by lenders will be treated as income in the hands of the borrowers and taxed accordingly.

It may then not matter whether the loan was utilised for acquisition of capital asset or for revenue expenditure purposes, say some tax experts.

The DTC Bill seeks to directly bring within the scope of income the amount of remission or cessation of any liability by way of loan, deposit, advance or credit.

This could affect corporate debt restructuring (CDR) activities in the country. Many tax experts are of the view that the clause concerned is quite broad and vague, which could lead to litigation.

“This provision could create issues for debt restructuring activities,” Mr Samir Kanabar, Tax Director, Ernst & Young, told Business Line.

CDR packages may not always involve waiver of loan repayments, but there could be cases where loans are rescheduled or partial waiver is agreed.

“The Code proposes to treat such remission (of loan, deposit, advance or credit) as income for tax purposes. However, the same may require reconsideration in light of genuine debt and financial restructuring exercises to mitigate undue hardships,” said Mr Aseem Chawla, Partner, Amarchand & Mangaldas.

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.