Students' corner

Business Standard / Mar 29, 2012, 00:57 IST




 Do you think banks rating B-school students will solve the bad loans issue?




BEST RESPONSE

As the number of bad loans are increasing, banks need to seek some measures for respite. By rating B-school students, banks can accordingly fix terms and conditions for them as well as track down the particular student’s performance. Thereby they can analyse students’ future ability to repay loans. This will help banks in minimising cases of bad loans, at least in the education sector.

Shivam Chhabra, Integral University, Lucknow

OTHER RESPONSES

The bad loan issue not only affects banks but also the whole economy. B-school are now emphasising on credibility and worthiness of loan seekers. Moreover, customer relationship is getting increased weightage on educational campuses. Perhaps, an increased level of knowledge in these areas in B-schools may help banks solve the bad loans issue to some extent. Jimit Parikh, St Kabir Institute of Professional Studies, Ahmedabad There are surfeit causes for bad loans — default on education loans being one of them. By rating educational institutions on placements, academic standards, intellectual capital and connection with industries as well as rating students on the basis of marks obtained in the qualifying exam, banks can structure their loan product better. These measures will definitely mitigate the issue of bad loans in the education sector and will also contribute to achieving inclusive growth. Though this is a step in the right direction, government also has to take some sector wise specific decisions to mitigate bad loans. Only then the problem can be solved.

Nilaya Mitash Shanker, Shanker, Shri Ram Swaroop Memorial College of Engineering and Management (SRMCEM), Lucknow

The quarter by quarter increase in non-performing assets (NPA) is a major concern for banks which leads to tightening of screws on the common man. According to the Reserve Bank of India, a major chunk of NPA include loans given to the agricultural sector whereas the proportion to the retail sector, especially educational loan, is very minimal. Thus, these does not make any huge difference in the overall kitty of loans provided by banks in the education sector. However, bank rating of B-schools gives the former a surety that their dues will be received on time and working capital of banks maintained.

Harsh Mehta, St. Kabir Institute Of Professional Studies, Ahmedabad

More trouble for Kingfisher

BS Reporters / New Delhi/ Bangalore Mar 29, 2012, 00:50 IST

Kingfisher Airlines’ problems seem to be never ending: While an income tax (I-T) tribunal directed it to clear its dues in weekly installments from April 7, a government official said the civil aviation regulator might take action against the troubled airline, if its employees and vendors were not paid soon.

But the cash-strapped carrier is likely to get more time to repay its service tax dues. Also, it named three independent directors on its board to comply with rules, after the last of its independent directors quit last week amid growing concerns over its survival.

The Bangalore bench of the I-T Appellate Tribunal directed Kingfisher to pay the remaining amount of the outstanding demand of Rs 349 crore to the I-T department in weekly installments of Rs 9 crore, starting from April 7. Kingfisher was also directed to furnish a bank guarantee against the weekly installments.

The bench had ordered Kingfisher to make a payment of Rs 44 crore of the outstanding demand on or before yesterday, which the airline complied with. It directed the department to lift the attachment of bank accounts immediately, so that Kingfisher could start smooth functioning and would be in a position to make the payments.

Spelling more troubles for Kingfisher, a government official in the know said: “The directorate general of civil aviation is likely to take action against Kingfisher, if it does not clear the dues of vendors or make salary payments to its employees soon. There is a concern whether the airline will be able to operate even the current truncated schedule.” He said the decision was likely to be conveyed to the airline chairman, Vijay Mallya, at a meeting that could happen as soon as this week.

Meanwhile, Kingfisher named Manmohan Singh Kapur, Lalit Bhasin and Shrikant Ruparel as new independent directors on its board.

While Kapur is a former chairman and managing director of Vijaya Bank, Lalit Bhasin is an accomplished lawyer and head of law firm Bhasin & Co. Ruparel is a former managing director of Kolhapur Sugar Mills and was on the State Bank of India board for 18 years. Indian rules require at least half of the directors on a publicly listed company to be independent.

“We cannot kill Kingfisher. We might give it some more time, if it pays some dues by March 31,” an official said. Kingfisher, which has cut down its operations substantially and has asked most staffers to stay at home, has agreed to pay Rs 10 cr of its Rs 76-cr service tax dues this financial year.

SBI rolls out one-time settlement scheme for small units

BL :K. Ramkumar & Priyanair:26 Mar 2012

State Bank of India has launched a one-time settlement (OTS) scheme for recovering bad loans in its micro, small and medium enterprises portfolio. To make the scheme attractive, the bank is also offering discounts to borrowers.

India's largest bank has seen a net increase of Rs 3,902 crore in bad loans in its MSME portfolio in the first nine-months of the current financial year.

Given the increase in bad loans, the bank has launched a non-discretionary and non-discriminatory scheme of OTS to give relief to MSME borrowers affected by the downturn in the economy.

Chronic, non-performing assets (doubtful or loss) in the MSME sector with investment in plant and machinery of up to Rs 10 crore are covered under the OTS scheme, said a bank official.

Many MSME units have been affected by the sharp rise in interest rates and fall in demand for their products.

CORPORATE PORTFOLIO

In the first nine-months of the current financial year, the highest net increase in bad loans for SBI was in the corporate portfolio (Rs 6,469 crore), followed by the MSME portfolio.

It is difficult to give corporates an OTS as banks usually have large exposure to them. Hence, banks prefer taking the legal recourse to make recoveries, said a senior banker.

Overall, SBI has recorded a net increase of Rs 14,772 crore in bad loans in the first nine-months of the current financial year.

As on December-end 2011, MSME advances accounted for 16 per cent of the bank's overall lending portfolio of Rs 8,46,266 crore.

As per the terms of the OTS, the application for compromise will be processed on deposit of a minimum of 5 per cent of the amount outstanding as on the date the account is declared an NPA.

The deposit is to commit the borrowers to the OTS process. 

The bank will receive applications for compromise settlement up to July 31, 2012.

A borrower has to pay 25 per cent (including the 5 per cent already deposited at the time of application) of the compromise amount upfront on sanction of the OTS by the bank.

 The balance amount of the compromise has to be paid within six months of the date of sanction without interest or 12 months with interest.

The bank has also thrown in an incentive to make the OTS attractive. It will give 15 per cent and 10 per cent discount on the OTS amount to those borrowers who make full payment within one month and three months, respectively, from the date of approval of the OTS.

A second restructuring of loans is a crying need for many manufacturers today.

BL:S Adikesavan:28 Mar 2012

How worse can it get before things start looking up for India's stressed manufacturing sector?

Last week, Gurusamy (name changed to protect identity), a 61-year-old spinning mill owner from Salem, was in tears as he spoke of the cash losses his company was incurring. “I have reached the end of my tether. I am worried that I may default on my bank loans, which has never happened to me for the last 30 years, Sir. And, I haven't been able to sleep or eat properly for the last six months,” he told me in between sobs.

A customer with our bank for more than 30 years, with a demonstrated record of repayment, Gurusamy was hit hard last year by the volatility in the prices of cotton, his raw material. The price of cotton, which he bought and stocked at approximately Rs 62,000 per candy (356 kg), came crashing down to Rs 33,000 in approximately three months. This year has been even worse, with his own end-product, yarn, not fetching remunerative prices. The drastic power shutdowns in Tamil Nadu have dealt an additional blow.

The text-book credit solution in such cases would be a repayment holiday till the stressed company generates cash profits, so that the debt overhang doesn't bring the curtains down on Gurusamy's unit. But doing so would also make his account a Non-Performing Asset (NPA). This is a dubious tag a conscientious entrepreneur like Gurusamy doesn't want.

Gurusamy's loan accounts had been restructured once in the past, in the aftermath of the 2008 global economic crisis. Following that restructuring, which involved a deferral of his term loan instalments, he promptly resumed repayment, as the business began generating cash surpluses. This continued right until the second half of 2011, when things started going wrong again. A second restructuring now would lead to a ‘downgrading' of the asset, as per the Reserve Bank of India (RBI) regulatory guidelines. Damned if you go for another restructuring, damned if you don't!

MANY GURUSAMYS

Across India, there are hundreds of borrowers like Gurusamy in sectors such as textiles, steel or sugar, caught in a bind after their accounts have already been restructured once. Under the RBI norms, a second restructuring will doom them to the NPA dustbin, which no genuine borrower (or lender) desires. They will then be blacklisted and clubbed along with other defaulters, who have diverted funds outside their businesses. All that borrowers such as Gurusamy are seeking is a reprieve from making payments, not a debt waiver.

The present times are extraordinary, indeed. The global economy is in turmoil again, as demand from Europe — a major export market for India — is down, interest costs have risen by nearly 30 per cent following the staccato hikes in the RBI's repo rates in the last one year, and the domestic economy itself is slowing.

Last month, one of India's largest integrated textile manufacturers, with a Rs 6,000-crore-plus turnover, announced a quarterly loss for end-December, for the first time in its history. This holds good even for a steel major, which posted a loss of Rs 262 crore, on a turnover of more than Rs 25,000 crore, as against a profit of Rs 960 crore for this quarter last year. The mood is clearly downbeat. In States such as Karnataka, mining bans have led to a freeze in iron ore supplies for medium-scale steel units. When there is no raw material, what are manufacturing units supposed to do? How can they even pay salaries, leave alone paying lenders?

To compound their woes, in many States, the power sector has been in the doldrums, with no coal or gas, and the distribution utilities themselves have no money to buy from generating stations. So, there are power shutdowns, both official as well as unofficial. In Tamil Nadu, for instance, there is a ‘power holiday' for eight days in a month, and restricted supply on some other days for industrial consumers. It would probably be no different in the remaining States.

TRYING ENVIRONMENT

The problems listed are real. Also, they are akin to ‘environmental' problems, unrelated to or abnormal in the context of businesses that these borrowers are in.

From a lenders' perspective too, there is a crying need for a ‘special dispensation' for restructuring of debts for such borrowers. This is because these issues are ‘special', lying outside the domain of both lender and borrower.

There is no way lenders can raise demand for repayment, when there is no internal cash generation in the first place. It is a typical Catch-22 situation that can be unravelled only through decisive regulatory intervention.

The RBI has itself, in the recent past, shown the way out — not once, but twice. In 2008, it brought in a special dispensation providing for a second restructuring, if required. The RBI guidelines of December 8, 2008, and January 2, 2009, were precisely a response to the spill-over effects of the global downturn.

“We reiterate that the basic purpose of restructuring is to preserve economic value of units, not evergreening of problem accounts,” the RBI noted then, while urging banks to undertake a careful assessment of viability, quick detection of weaknesses, and a time-bound implementation of restructuring packages.

Again, in 2011, when the Andhra Pradesh government issued an ordinance, clamping down on the excesses of micro-finance institutions that led to recovery problems, the RBI allowed one-time restructuring of bank loans to these institutions without affecting their asset status (The RBI norms, in the normal course, permit only the asset-status of industrial units to be maintained as ‘standard', after restructuring).

RESTRUCTURING WITHOUT NPA

In order that such a provision is not misused, the RBI can restrict the proposed ‘special dispensation' facility only to units that have long-term viability, have an established record of payments, and not resorted to diversion/siphoning off funds, and can bring in additional promoter's contribution. There can further be a special time-bound external audit to attest to these facts.

This facility is necessary more for mid-corporates and units with a turnover of up to say, Rs 500 crore. The bigger players and the mega-corporates generally ‘know' better how to take care of themselves, and also tap the right people for this purpose.

In this former case, at stake are not merely a few loans becoming NPAs. All these companies provide employment to thousands of families. Gurusamy's unit alone employs some 500 workers. We have precedents that show a second-restructuring provision is an acceptable solution to assist such businesses in distress for no direct fault of theirs.

In matters of monetary policy, the regulatory authority always likes being ‘ahead of the curve'. The current dire milieu calls for a similar imaginative ‘ahead-of-the-curve' approach on RBI's part.

A second-restructuring, special dispensation package for units facing stress due to ‘environmental reasons' is the minimum that ‘policy' can do to prepare borrower-entrepreneurs like Gurusamy survive trying times.

Else, as Benjamin Franklin once said, “By failing to 

prepare, we may be preparing to fail”.

(The writer is with State Bank of Mysore. Views expressed are personal.)

How Dunlop became a shell of itself

An apparent defeat in a 2007 Madras high court order opened the doors

 for the sale of assets

 Live mine :Arnab Dutta :Thu, Mar 29 2012. 1:00 AM IST

Confined for a decade in a custom-bonded warehouse in Chennai, machines imported by tyre maker Dunlop India Ltd, but not delivered to it because of its inability to pay, turned into the key with which its then chairman Pawan Kumar Ruia managed to unlock the value of the company’s “non-core assets” or land.

Justice Sanjib Banerjee of the Calcutta high court ruled on Monday that Dunlop’s sale of these assets to subsidiaries was a fraud on other stakeholders, and ordered a court-appointed liquidator to reclaim them. The court’s order, an earlier order of the Madras high court, and filings before the Board for Industrial and Financial Reconstruction (BIFR) and its appellate body (all reviewed by Mint) present a picture of just how Dunlop managed an operation that the judge said had been “meticulously planned...with the skill of a trained killer”.

A spokesperson for the Ruia Group said Dunlop had obtained a legal opinion before transferring its assets. He declined to make any further comment. On Monday, the spokesperson had said it would appeal the order. On Tuesday, Dunlop moved the division bench of the Calcutta high court.

Railways-controlled Container Corp. of India Ltd held the machines in question in 11 containers for almost a decade before auctioning them in July 2006 for Rs.1.34 crore. Dunlop moved the Madras high court seeking to restrain the company from selling these machines, citing protection under the Sick Industrial Companies Act.

Though the auction was stalled, Dunlop’s petition was eventually dismissed in December 2007. In its final verdict, the Madras high court said the tyre maker wasn’t a sick firm any more as its net worth, or equity plus free reserves, had turned positive at the end of fiscal 2007.

An apparent defeat, which cost Dunlop machines worth Rs.1.34 crore, was a small price to pay for freedom and the loan of either $125 million or $250 million, or Rs.575 crore or Rs.1,150 crore, that it eventually fetched for Ruia’s privately-held firms. For Ruia, the ruling was his biggest victory since he bought majority control in Dunlop from its erstwhile promoter, the late Manohar Rajaram Chhabria’s Jumbo Group, in December 2005.

In 2007, Ruia had at least twice tried to secure the release of Dunlop from the regulatory oversight of BIFR, but failed. 

He had, by the end of fiscal 2007, revalued Dunlop’s assets at current prices, which resulted in a gain of close to Rs.600 crore in its reserves and the company’s net worth (equity and reserves) turned positive—Rs.242.65 crore.

Yet, in July 2007, BIFR, which comes under the purview of the finance ministry and deals with companies in poor financial health (recommending revival plans or their closure), refused to release Dunlop from its oversight because it wasn’t convinced about its true financial health.

Dunlop had by then already sold four key assets to as many subsidiaries—a move declared “illegal” by BIFR because its consent wasn’t obtained. Instead of freeing Dunlop, BIFR, in an order passed on 23 July, 2007, asked the firm for details of these transactions, while restraining it from selling more properties.

Dunlop moved the Appellate Authority for Industrial and Financial Reconstruction (AAIFR) challenging BIFR’s order, but it, too, refused to unshackle the tyre maker. In an order passed on 4 December 2007, it questioned the rationale for the company seeking to give up the benefits of creditor protection.

One consideration, the AAIFR order said, could be the management’s plan to sell Dunlop’s assets, which are of “very high value”, and “siphon off” funds to other companies.

With the Madras high court ruling that Dunlop wasn’t a sick company any more within days of the AAIFR order, the tables turned. By February 2008, Ruia secured the release of Dunlop from the regulatory control of BIFR, the Madras high court being a higher judicial forum than AAIFR.

Till then, Dunlop had taken only the first step towards unlocking value from its “non-core assets”. 

On 28 February, 2007, Dunlop’s board decided to transfer to newly founded subsidiaries some of its most valuable assets—its one-acre office in Mumbai’s upscale Worli neighbourhood, 178.6 acres at its Sahaganj factory in West Bengal, 59.7 acres in Goa and 58.5 acres in a village near Chennai.

Dunlop’s board decided to sell “all non-core assets” to wholly-owned subsidiaries “for better and optimum utilization of core assets of the company”, says the agreement for sale of the Sahaganj land. Dunlop Infrastructure Pvt. Ltd bought the land for Rs.60 crore in a deal that officers in West Bengal’s land and land reforms department say is illegitimate because of the state’s restrictive land ceiling laws. The officers did not wish to be named.

“Such a large property in West Bengal can be held only with the permission of the state government, which the buyer did not obtain,” one of the officers said. “It isn’t known whether the sale was at all concluded by paying the state government the requisite stamp duty and registration fee.” The subsidiaries paid for these properties in shares issued to Dunlop at a substantial premium—all these companies issued shares at around Rs.1,000 apiece.

Dunlop has not been able to explain at any legal forum how it determined the valuation of these assets, according to court orders.

Its Mumbai property, which was bought by Bhartiya Hotels Ltd, fetched the highest price—Rs.150 crore, followed by the 58.5 acre plot near Chennai, which went for Rs.80 crore, while the Goa property was sold for Rs.30 crore. The Goa and Chennai properties were bought by Dunlop Estates Pvt. and Dunlop Properties Pvt. Ltd, respectively. Dunlop earned Rs.320 crore in all from these cashless transactions.

The value of two of these properties were eventually unlocked in September 2008, when ICICI Bank Ltd agreed to lend either $125 million or $250 million to two Ruia Group firms—Shalini Properties and Developers Pvt. Ltd and SPR Resorts Ltd—as per the deed of mortgage against the pledge of the Worli property and the land near Chennai. In two transactions that took place on 26 September 2008, ICICI Bank offered credit facility of $125 million against mortgage of these properties. Since separate agreements were signed for each property (without referring to the other), it isn’t clear whether the bank loaned $125 million against each of the properties (which would mean a total loan of $250 million), or both.

“Why Bhartiya Hotels and Dunlop Properties mortgaged these assets for the benefit of other firms isn’t explained,” said a lawyer familiar with these transactions. He did not wish to be named. “Also important is the fact that companies that received the credit facility had little or no business at all.”

In 2010-11, Shalini Properties, which describes itself in regulatory filings as a dealer in real estate, had revenue of Rs.3.2 crore—down from Rs.9.66 crore in the previous year—and its net loss for the year was Rs.81.71 lakh. SPR Resorts had revenue of Rs.3,200 from services offered by it in the year till March 2011 and reported a net loss of Rs.1,841, according to regulatory filings with the Registrar of Companies.

What is even more surprising is the fact that the money couldn’t be traced in the balance sheets of Shalini Properties and SPR Resorts, according to another lawyer, who also didn’t wish to be identified. “The money seems to have come and disappeared without leaving any trace,” he added. Mintcouldn’t independently ascertain this.

The liquidator’s efforts to recover the assets sold by Dunlop could face resistance from ICICI Bank, which has loaned money against mortgage of the Mumbai and Chennai properties, but there shouldn’t be much of a problem recovering the assets in Sahaganj and Goa as they haven’t been pledged yet, according to the lawyers cited above.

On Tuesday, ICICI Bank moved the Calcutta high court seeking to participate in the so-called wind-up proceedings launched against Dunlop by its unsecured creditors, in an attempt to protect its exposure to the firm. 

The court allowed the bank to join the proceedings. 

The ICICI Bank spokesperson didn’t respond to an emailed questionnaire.

arnab.d@livemint.com

Sharp rise in debt recovery cases amid slowdown

63,669 cases were pending at debt recovery tribunals till 31 Jan

compared to 37,616 cases till Dec 2010

liveMint:Kian Ganz & Remya Nair:27 Mar 2012

Mumbai/New Delhi: The number of pending cases at India’s debt recovery tribunals (DRT) has increased by almost 70% in about a year, with the economic slowdown affecting the repaying capacity of borrowers and thus worsening the asset quality of banks.

Also, slow clearances of cases in the tribunals is adding to the pendency, say lawyers and analysts.

In response to a question in the Lok Sabha on 23 March, the finance ministry said 63,669 cases were pending in the tribunals as of 31 January. On 31 December 2010, 37,616 cases were pending, according to a Right to Information (RTI) request filed by Prashant Reddy, an intellectual property (IP) lawyer who also blogs on industry blog Spicy IP.

There are 33 DRTs in India, with three each in Chennai, Delhi, Kolkata and Mumbai—the last three having the maximum number of pending cases. The amount locked in as a result was Rs1.57 trillion as on 31 January, against Rs1.13 trillion as on 31 December 2010.

DRTs are semi-judicial authorities that help banks by speeding up the recovery process through steps such as issuance of attachment orders.

An official with the Indian Banks’ Association, who did not want to be identified, cited two reasons for the sharp increase in the number of pending cases at the debt tribunals.

“First is that more banks are approaching the DRTs to recover their bad debts,” this official said. “The second reason is that borrowers are also going to DRTs to challenge actions taken by banks under the Sarfaesi Act.”

The Sarfaesi Act, or Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, allows banks to auction properties of borrowers who fail to repay their loans, or recover their loans through securitization and asset reconstruction.

Of the 63,669 pending cases, 37,654 have been pending for more than a year. The finance ministry said a committee headed by a chairperson of the debt recovery appellate tribunal is examining the “legal, structural, administrative, monitoring and supervisory systems” of DRTs and will recommend measures to make these tribunals more effective and efficient.

“It is often challenging for DRTs to get all the interested parties together at one time. Hence, it becomes a long-drawn process. Banks facing large downside risks (dilution of market value of loan assets) try to settle NPAs (non-performing assets or bad loans) through one-time settlements or corporate debt restructuring,” said Robin Roy, associate director (financial services), at PricewaterhouseCoopers Pvt. Ltd. “Banks do a cost-benefit analysis before taking cases to DRTs as there could be substantial costs attached (long waiting periods) to going to DRTs.”

Banks have three legal options for resolving NPAs—the Sarfaesi Act, DRTs, and Lok Adalats, which are non formal alternative court, he said, adding that while loans above Rs10 lakh go to DRTs there is no sector-specific condition for approaching the tribunals.

Dushyant Kumar Mahant, a lawyer who has represented borrowers in the DRTs several times, said the case load has risen dramatically particularly because of the steep increase in property prices, which has resulted in many borrowers taking loans that they end up not being able to service.

The low disposal rate at the DRTs was caused by infrastructure problems, inadequate staffing also at senior levels, and non-cooperation by borrowers’ lawyers, said Navneet Gupta, Delhi-based partner at law firm SNG & Partners and who often represents banks.

Another lawyer who did not want to be identified blamed the bodies overseeing the DRTs and other tribunals. “The main problem is the appointments. It takes them 6 or 7 months to appoint the presiding officer and then the presiding officer has only a term of five years under the recovery of bad debt Act (Recovery of Debt due to Banks and Financial Institutions Act, 1993,) and they will start looking for a new guy after the old guy retires,” this lawyer said.

“It’s very lacklustre,” said one DRT lawyer about the presiding officers at many DRTs. “You go over there and even if (you) ask to present an argument over there, the matter is adjourned for one reason or another—(the officers) don’t have the bent of mind for disposal rate. It is very difficult for pendency to go down (this way).”