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.)

Banks seek fig leaf for bad loans

Source :Nidhi Nath Srinivas :ET; 6 Feb 2012

Yarn, fabric and clothing companies are in a sweet spot. They owe banks so much that now it is their lenders’ job to ensure they survive. With wild enthusiasm, banks have lent the textile industry Rs 2,50,000 crore over last 12 years. Till 2008, the going was good. Now companies say they can’t even pay interest on Rs 50,000 crore in working capital loans. Upto 15 per cent of loans to this industry are stressed and the number is rising fast.

In today’s precarious times, such a gaping hole could be the last straw for banks. Usually banks extend the payback period in such cases. But here is the googly. Most of these loans have already been ‘restructured’ once in the last two years. If payments fall behind a second time, the account has to be classified as a ‘Non Performing Asset’ on the bank’s balance sheet. Banks have to put aside money from their profits to make good these losses.

Each NPA shows a bank’s error in choosing credit-worthy customers. Given that loan risk assessment is the bread-and-butter of high-street banks, there can be no explanation except incompetence or lack of foresight from the account manager upwards. Reluctant to have their errors of judgment made public, in December, a dozen banks asked the RBI to relax the rules on declaring bad loans and let these twice restructured loans remain standard. Because such relaxation flouts international prudential and accounting norms, quite sensibly, RBI refused. Moreover, it believes such relaxation won’t solve the industry’s problems.   

But the situation is too grim to be left at that. Banks have now asked RBI to allow relaxation for at least loans above Rs 100 crore so that only the smaller accounts are re-classified. It’s a desperate attempt to find a fig leaf. Hopefully, the RBI will stick to its guns at the second round of talks this week. Banks lent to each company with eyes wide open. Unlike loans to farmers and small business, there was no pressure to lend.   

In their defence, banks and companies say the current distress stems from the decline in demand for clothing in 2010 and cotton’s extraordinary price volatility in 2011, which no one could predict. This does not wash. Common prudence should have made bankers also study scenarios where raw material becomes expensive and demand tanks. Ultimately, it is a question of efficiency. The biggest players, with enough backward and forward integration to ride out the storms, continue to make money. Those in distress today were clearly unworthy of large loans in the first place and should now be written off. There is no reason why RBI should encourage banks to hide this truth from shareholders by changing norms four weeks before the fiscal ends.   

Textile companies themselves are hardly deserving of a second chance. Promoters greedily took loans to profit from a government interest subsidy scheme even if it made little business sense. Few would have dared to expand capacity so rapidly with loans at market rates. Three-quarters of the capital employed today is borrowed. Such high leverage leaves companies susceptible to the slightest tremors.       

Companies complain they are in a fix because China is not buying enough yarn, while USA is buying more clothes from Bangladesh and Vietnam. Within India, they pin the blame on price volatility, government policies and slow demand for branded clothes. In short, it’s not their fault. This is hard to swallow. Poor financial results and falling market share are never the problem but a symptom of the problem. The real issue is that Indian textile companies are small, labour-intensive, non-integrated spinning, weaving, finishing and apparel-making outfits. Only 3% are large composite mills.

Today's world demands economies of scale.  Indiscriminate government subsidies in the name of job creation further encouraged promoters to use public money for creating more such fragmented capacities that are inevitably idled at first signs of trouble. There is no way the market can give them 14% post tax returns necessary to service loans.

Any bank with such expectation is chasing fool's gold.  Banks, industry and government are equally culpable in creating this crisis that threatens to leave lasting scars on the lending system. Yet this is also an opportunity to create future growth. It is a mirage that the textiles industry is too big to fail. On the contrary, its myriad small units have outlived their utility. Their exit will occur only when banks face the consequences of their actions. All textiles sector subsidy schemes should end. Individual livelihoods can't be protected by industrial dinosaurs.

Your rights against a recovery agent

Source :Bindisha Sarang :livemint:6 Feb 2012


If you happen to default on your loan due to unavoidable circumstances, 
you must know your rights 



Banks’ non-performing assets (NPAs) are on the rise and how. Consequently, to keep the NPAs under check, there is a possibility that banks will shift gears as far as recovery activities go even for retails loans such as home loan, personal loan and credit card debt. Of course, one should never bring oneself to a point where he/she has to face a recovery agent.


But if you happen to default on your loan due to unavoidable circumstances, you must know your rights. Of course a recovery agent is supposed to get you to pay all the dues, but there are certain things he can can’t do during the recovery process. 


The Reserve Bank of India (RBI) has issued guidelines on training recovery agents and the methods they can adopt for collection. “Recovery Agents engaged by Banks” guidelines were issued by RBI on 24 April 2008.


 As per the annual report on banking ombudsman, 2009-10, as many as 1,609 complaints were received against direct selling agents and recovery agents put together. Here’s a list of what recovery agents can’t do.
Can’t refuse to reveal his identity


To start with, always check the identity card of the recovery agent to avoid harassment of any kind by an unknown person. This card is issued by your bank or issued under the authority of the bank. A recovery agent can’t refuse to show this card if you demand so.


Can’t breach your privacy


Recovery agents are mandated to follow certain privacy rules and can’t discuss your debt with your neighbours or employers. Therefore, they can’t threaten you with that. If they do so, you can register a complaint against him with your bank.


Can’t call you up at odd hours or at untimely occasions


If the recovery agent calls you at odd hours, early morning or late at night, you are under no obligation to entertain such calls. As per RBI guidelines, recovery agents should contact you between 7am and 7pm.


 In addition, if you do not want calls at a particular place, such as your workplace, you can ask the agent to get in touch with you at home. In case you work in shifts, the agent may call you up at any other appropriate time specified by you.


If there is a death in your family or any such event, you can tell the agent not to call you or make visits for a few days.


Can’t use abusive language


At times recovery agents need to be firm to collect pending dues, but that does not mean they are allowed to use abusive language. If the recovery agents crosses the line of decency, report his behaviour to the bank.


If the respective bank doesn’t heed your complaint against the agent or you are not satisfied by its response, you can get in touch with the banking ombudsman.

SBI set to publish photographs of defaulters to force them to pay dues

Source :E T :4 FEB, 2012, 11.14AM IST, DHEERAJ TIWARI,ET BUREAU 



NEW DELHI: Country's largest lender State Bank of India will soon start publish photographs and names of wilful defaulters in leading publications as a last resort to get them to pay their dues. 


This comes at a time when banks are facing problem with recovery of loans in both corporate and retail segment. 


A senior bank official confirmed the development but said this will be used as a measure of last resort. "The idea is to discourage the public from defaulting on loans. We will send them notices before going ahead with such measures," he said. The bank will further ensure that name and photographs of only those borrowers will be published who have wilfully defaulted. "The permission will granted by the chief general manager of the circle after proper due diligence." 


As per RBI regulation, a 'wilful default' would be deemed to have occurred if there is a default in meeting of payment or repayment obligations to the lender even when the borrower has the capacity to honour the said obligations. A wilful default would also mean if the borrower has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes. 


A senior manager with the bank's stressed asset management group said that there was a feeling among bankers that the old practices of printing notices of insolvency was no longer a deterrent. 


"In the old days it used to be such a matter of family shame. These days nobody even notices in it the newspapers. So the fresh approach may ruffle a few feathers," he said, adding that the social pressure will be much more if those photographs and names appear in the local publications. 


The total bad loans for the bank till September 2011 was at 33,946 crore, as against 23,205 crore in the corresponding period last year. 


The total non performing assets in the Personal retail segment stood at 4,870 crore. 


A senior official with a south-based state run bank said that such move will increase the pressure manifold on the borrower. "Even if at the branch, the name and photograph of the person is there as defaulter, a large section who bank in that area will know," he said.


 Under the present regulations, such financial information is made only available to the other financial institutions which may have lend to the company or borrower besides the banking regulator RBI and to some credit information companies such as CIBIL.