Rajan to set right defaulters, builds a info repository

ET  :5th Oct 2013

MUMBAI: RBI Governor Raghuram Rajan is leaving no stone unturned in his efforts to end promoter abuse of the benign loan restructuring regime and is soon poised to mandate all banks to stick to uniform loan classification norms.

Three people familiar with the idea said the governor, who has been meeting bank chairmen over the past two to three weeks independently and some in groups, has said lenders should share information about defaulting clients. Rajan is building a repository of information about defaulters that could help banks ensure they do not get duped by unscrupulous promoters.

"Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalise their failed ventures," he had said at his first press conference after taking charge.

The Indian banking system, especially state-run banks, is facing a continuous downgrade by ratings companies such as Standard & Poor's and Fitch because of rising bad loans and concerns that many restructured loans could turn bad.

The absence of a repository is believed to have led to some of the biggest losses to banks.Kingfisher Airlines and Deccan Chronicle Holdings, which together inflicted losses of more than Rs 11,000 crore, might have been prevented if the banks had shared information and a repository was in place.

Deccan Chronicle Holdings, which went public in 2004, took loans from several banks to expand the circulation of Deccan Chronicle newspaper in several cities and started a new business newspaper, Financial Chronicle. However, the slowdown affected the company's expansion plan and profitability.

"Nobody knew how much Deccan had borrowed from the banking system. Today, Cibil has information on all borrowers.

However, if banks share this information with RBI, it would get information on the banking system's indebtedness to companies," said Romesh Sobti, managing director and chief executive officer, IndusInd Bank Numbers compiled by the Corporate Debt Restructuring Cell shows loans worth Rs 2,29,013 crore of 401 companies have been restructured as of March 2013.
The latest RBI initiative comes after the banking system had to write off loans worth Rs 12,000 crore given to Deccan Chronicleand Kingfisher.

"The move to set up a repository is a proactive step to prevent fraud," said SK Kalra, executive director of Andhra Bank. "Secondly, this will make it difficult for borrowers to conceal from lenders the loan they have taken from other banks in case the loan is availed through multiple banking routes."

Currently, under the consortium banking route, each lender is mandated to inform all lenders about the loans on their books. However, in case of multiple banking facility, lenders are unaware of loans a borrower has availed from other banks.

Conflict between private and public sector lenders and qualification of assets are also delaying the recovery process.

"If one bank treats it as a standard asset, the company can always approach that bank for fresh funding," said a state-run banker who did not want to be identified. "In the case of Kingfisher, since the company is non-operational now, that risk is not there."


Indian banks' stressed assets rose to 9.1% of total loans (NPL ratio: 3.4% and restructured loans ratio: 5.7%) in fiscal 2013, from 6.1% a year before, says Fitch Ratings.

Sarfaesi and RDB Acts :Empowering debenture trustees: Govt to seek AG advice

IE :Sandeep Singh , Amitav Ranjan : New Delhi, Wed Sep 25 2013, 01:19 hrs

As the government is contemplating to amend Sarfaesi and RDB Acts or pass a notification to empower debenture trustees (DTs) to carry out speedy recovery of the dues to debenture holders as had been earlier proposed by the Sebi, the law ministry has given a go ahead to the finance ministry to seek the opinion of the Attorney General on steps that can be taken to empower the DTs.

A letter dated July 26, 2013, written by the additional government advocate said, "As approved by Hon'ble MLJ (ministry of law and justice) this matter may be placed before learned Attorney General for his considered opinion on the issues."

The issues on which the AG's advice has been sought relate to three points — whether the Central government can notify DTs as financial institutions under Sarfaesi Act and the RDB (Recovery of debt due to banks and financial institutions) Act. Whether such DT will be within its right to take recourse to Sarfaesi and RDB Acts for recovery of principal and interest amount of debenture which is due to individual debenture holders and thirdly whether amendment in Sarfaesi Act and RDB is necessary to enable DTs to carry out recovery proceedings under these acts. The Acts enable banks and financial institutions to recover their dues, however, common investors are not able to do so and it has been proposed to recognise the debenture trustees as financial institutions by either amending the Acts or issuing a notification which in turn will give them the ability to recover debenture holders' dues.

Sebi chairman UK Sinha had written a letter to the finance ministry on December 3, 2012, urging it to consider amending the Acts in a manner that it empowers the DTs to carry out recovery proceedings swiftly.

DLF may sell Rs 900 crore assets to Shriram Group to cut over Rs 21,000 crore debt.

Realtor in talks to divest stakes in southern projects to cut over Rs 21,000 crore debt.

Anshul Dhamija & Boby Kurian, TNN | 30 Sep, 2013, 10.55AM IST

BANGALORE: Realty giant DLFBSE -2.54 %has held talks to divest some of its southern projects worth about Rs 900 crore, or $150 million , to the developer arm of the Chennai-based Shriram Group, said people directly familiar with the matter. 

Shriram Properties is in discussions to acquire land parcels and not yet launched projects of DLF, which is seeking to pare its $3.5-billion (over Rs 21,000-crore ) debt through non-core divestments. 

DLF wants to focus on select cities and pursuer highend developments with better operating margins.

The privately held unit of the $9-billionShriram Group has had more advanced negotiations with DLF regarding the latter's two land parcels in Hyderabad but the discussions also covered not yet commenced projects in cities like Chennai. 

India's biggest developer DLF is unlikely to exit projects that are already under construction. Sources mentioned earlier said DLF has to decide whether it should divest at lower valuations, or wait longer. DLF also has lockin clauses and should retain a stake in some of these projects under the land acquisition agreements with state bodies, which complicates the value-unlocking moves, added one source who did not wish to be named since the talks are private.
When contacted, both Shriram Properties and DLF declined to comment on market speculation. 

Property brokers have assessed that in the years leading up to the 2008 economic meltdown, DLF had splurged at least $1 billion in land aggregation in south India. The total developable area of DLF's land holdings between Chennai, Bangalore and Hyderabad add up to around 18 million sq ft, said an international property consultant, who has reviewed the land parcels. DLF shares ended nearly 3% down at Rs 132 in Mumbai on Friday. 

Shriram Properties, a zero-debt company and sitting on Rs 400 crore cash, could fund the transaction through structured financing support from investors like Indiabulls and JPMorgan. The Shriram group arm has explored tying up more than Rs 1,200 crore in structured debt to step up the development story ahead of a possible initial public offering in the near future. 

Last week, TOI reported that Shriram was also in dialogue with a real estate fund of the Tatas to sell a minority stake. Private equity investors TPG, Starwood Capital and Walton Street are other existing backers of the company.

Arrears received by lawyer who stopped his practice on being elevated as judge not taxable as business incometax under section 176(4).

Arrears of professional fee received by assessee after he had discontinued his legal profession of lawyer on being elevated as a judge of High Court couldn’t be taxed as business income despite insertion of section 176(4) in the Act

In the instant case the assessee was a practising lawyer before his elevation as a judge of the Delhi High Court. He received certain amount of arrears of his professional fees for professional services rendered in the earlier years before his elevation as a Judge of the High Court. 

The AO held that such receipts were chargeable to tax under section 176(4). On appeal, the CIT (A) deleted the addition made by the AO. Aggrieved revenue filed the instant appeal. 

The Tribunal held in favour of assessee as under:

1) As per provisions of section 176(4), in the case of cessation of a profession by a professional, the receipt of any sum after such cessation shall be deemed to be the income of the professional and would be taxed in the year of receipt as if, it had been received prior to the cessation of the profession;

2) Section 176(4) introduces a legal fiction, which should be limited only to the purpose for which it has been created. Section 176(4) merely treats the receipt as the income of the recipient. In the absence of any further fiction in the section, the character of such receipt cannot be determined and no further fiction can be introduced so as to determine the head of charge under which such receipt would fall;

3) Thus, the express language of section 176(4) does not render the receipt to be treated as profit and gains of business or profession (PGBP). Therefore, in spite of introduction of section 176(4) in the Act, the receipts in question couldn’t be treated as the assessee's income falling under the head "PGBP”, even though they were the fruits of the assessee's professional activities;

4) It was due to the absence of any legislative provision that these receipts couldn’t be treated as business income falling under the head "PGBP”. They couldn’t be included in the total income of the assessee, even though the amount was received by the assessee before the discontinuance of his profession due to his elevation as the High Court Judge. Thus, the order of CIT (A) was to be confirmed. – ITO v. Justice Rajiv Shakdher [2013] 36 taxmann.com 585 (Delhi - Trib.)

Levelling the playing field for banks

Illustration by Shyamal Banerjee/Mint

Live Mint :Viral  V Acharya :Sun, Sep 29 2013. 07 30 PM IST

Over the past year, the non-performing assets (NPAs) of Indian banks have risen steadily. They now exceed 5% of advances. This is a rather high number in an absolute sense, but also in the relative sense compared with banks in other countries. The NPAs are significantly higher for public sector banks than private lenders. The real problems may be deeper as many loans are under restructuring and not yet recognized as NPAs for their full likely losses.

While these balance-sheet numbers suggest concern regarding future losses, market-based data can help assess the preparedness of Indian banks to deal with these losses. At the V-Lab in New York University’s Stern Business School, we estimate the capital needs of banks in future stress. We use market data to assess the downside risk of banks and assess their gearing in a stress scenario by comparing their book liabilities to market value of equity after taking account of the downside risk.

Our estimates suggest that in the event of a minus 40% correction to the global market over a six-month period, as seen in the Great Depression and the Great Recession, publicly traded Indian banks and financial firms will require over $80 billion of equity capital to maintain a market equity ratio of 8% relative to their assets.

To put this number in perspective, let us benchmark it. The required capital need would be over 5% of India’s current gross domestic product (GDP) and over 60% of the market value of equity of these firms. The same number for China is about $480 billion, so 6% of China’s GDP, but less than 35% of the market value of equity of the financial sector.

While a minus 40% correction to the global market is arguably a rather stressed scenario, these numbers suggest the Indian financial sector’s capacity to recapitalize itself in future stress is worth a careful scrutiny. What is somewhat disturbing is the composition of the capital needs we estimate. More than $50 billion of our estimate comes from 10 large public sector banks, and it is twice their market value of equity. This is consistent with higher NPAs at these banks than other banks.

Why have public sector banks done worse than private sector banks in terms of asset quality? And, why are they so vulnerable to future stress?

The seeds of the troubles at public banks were in fact sown in the autumn of 2008. As the Indian banking sector experienced unexpected funding problems in late 2008, some private sector banks heavily exposed to the wholesale markets became vulnerable. Deposits, retail and especially corporate, flooded the public sector banks. Private sector banks could increasingly borrow only at shorter end of the maturity, whereas term deposits flocked the public sector banks.

My research with Nirupama Kulkarni of the University of Berkeley documents that this flight of deposits out of private sector banks was worst for the riskiest private sector banks. In contrast, the flight into public sector banks benefited them indiscriminately. That is, even the risky public sector banks experienced deposit inflows. The flight of depositors was clearly in pursuit of the stronger government guarantees perceived for the public sector banks, since unlike private banks, they would receive ready injection of government capital.

This lack of a level-playing field in deposit funding in 2008 has had deep consequences for leverage and asset-quality decisions of the Indian banking sector over the past five years. Disciplined by the funding problems then, private sector banks have, by and large, operated at much lower leverage, often less than half of the public sector banks, even though their reliance on fragile wholesale funding appears to have survived in case of some banks. The lower leverage has given these banks a greater cushion for absorbing future losses. Their lending since 2009 has also been much more prudent relative to public sector banks.

While the easy lending by public sector banks could be seen as the much-needed stimulus to the economy, such strategy of propping up growth through state-owned banks and finance companies has back-fired worldwide. The housing bust in the US and the current stress in the Chinese banking system from loans to infrastructure are cases in point. To address this vulnerability, two steps are worth considering.

First, some of the public sector banks that have most gearing should be recapitalized now and their debts reduced, as they still have reasonable market values of equity. This could be achieved, for instance, through deep-discount rights issues as my co-authors, Yakov Amihud and Sabri Oncu, have suggested. This will put the burden of further losses on their shareholders rather than on taxpayers in due course. It is also likely to improve their incentives to restructure troubled assets promptly.

Second, public sector banks need to be slowly weaned off their funding advantage coming from government guarantees. In the short run, this could be achieved by requiring them to pay a deposit insurance premium that compensates for the guarantee they cash in on in stress times. They could also be subjected to larger capital buffers given their funding reliance on the state rather than the market.

Over the long run, some of the public sector banks can be privatized or their assets reallocated. Some of them could be acquired by the relatively well-capitalized private sector firms; the ones with worst asset quality could be wound down; and, greater entry of smaller and newer banks can be enabled to maintain healthy levels of competition.

Viral V. Acharya is CV Starr professor of economics, department of finance, New York University Stern School of Business.

SBI chairman summoned to court on last day in office

BL :Vinsonkurion ;Thiruvananthapuram, Sept. 29:2013 

Contempt petition filed by officers’ union for withdrawing ‘check-off’ facility

The Madras High Court has issued a notice to Pratip Chaudhuri, Chairman of State Bank of India, to present himself in court on Monday, his last day in office.

Chaudhuri and Ranjit Goswami, Chief General Manager (Human Rsources) of the bank, have been summoned in a contempt petition filed by the SBI Officers’ Association and State Bank Officers’ Federation.

A notice has been sent to Chaudhuri in his personal name as well, D. Thomas Franco Rajendra Dev, General Secretary of the Officers’ Union, Chennai circle, informed Business Line.

The contempt petition was invoked against breach of an interim stay on a contentious circular issued by the bank withdrawing the ‘check-off’ facility provided to the association.

This facility provided a lifeline to the association in the form of individual subscriptions from salary accounts of member-officers routed to its account by the bank.

LIFELINE

The management ensured that subscriptions ranging from Rs 100 to Rs 200 per employee went into the association’s account on the 25 {+t} {+h} of every month, the salary payment day.

The convention has been that, at the time of joining, every employee gives a standing 

instruction in writing authorising the bank to deduct the sum from his/her salary account.

The management has sought to withdraw the facility suggesting to members of the unions that they pay up their subscriptions individually, Rajendra Dev said.

Earlier last week, the court had allowed a petition seeking an interim stay on the management’s circular withdrawing the ‘check-off’ facility.

While grating the interim stay, Justice N. Kirubakaran had observed that the facility was in operation right from 1975.

It is sought to be withdrawn, and in fact given effect on September 17, 2013, at a time when a similarly placed union (staff union) is enjoying the same benefit.

ORDER IGNORED

“This amounts to discrimination,” Justice Kirubakaran said in his order, copy of which is available withBusiness Line. 

But the management chose to ignore the stay order and went ahead to pay the salary on September 25 without effecting the check-off facility to members of the circle associations.

This is what forced the unions to file a contempt of court petition, Rajendra Dev said. SBI officers and clerical staff unions have a combined membership of more than two lakh.

vinson.kurian@thehindu.co.in

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Contempt petition invoked against breach of an interim stay on a contentious circular issued by the bank’s management withdrawing the facility where subscriptions of member-officers are routed to the association’s account by the bank.

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