Banks seek stricter norms for reporting on wilful defaulters

BS Abhijit Lele  |  Mumbai  

August 28, 2014 Last Updated at 00:50 IST

Aimed at preventing defaulters from taking fresh loans from other lenders

Banks have urged the Reserve Bank of India (RBI) to amend the norms for reporting on wilful defaulters and non-performing assets (NPAs). They said to prevent defaulters from taking fresh loans from other lenders, reporting to RBI and credit information companies should continue even after NPAs were sold to asset reconstruction companies.

Banks and financial institutions can’t grant additional facilities to those listed as wilful defaulters. Also, those identified as having siphoned or diverted funds or involved in fraudulent transactions are barred from securing institutional finance.

Senior public sector bank executives said there was apprehension the banking system would be misused by wilful defaulters after banks stopped reporting about them. Continuing such reporting would help asset reconstruction companies recover dues from the assets acquired by them and, consequently, redeem security receipts, they added.

After the asset quality of lenders was hit by the economic slowdown, risks of a hit to loan books emerged. Also, various sector-specific concerns have come to light, especially in the power, roads and airline sectors. Exposure to certain group firms with excessive leverage has also hit asset quality.

Through the past three years, the credit quality of banks in India has deteriorated sharply. Gross NPAs increased from 2.4 per cent of gross advances in March 2011 to 4.4 per cent in December 2013, before improving to 4.1 per cent in March 2014.

Banks, through the Indian Banks’ Association, have also urged RBI and credit information companies to maintain a database of wilful defaulters. Any addition or deletion from this database should be carried out only after receipt of information from banks that had reported the wilful default, banks said.

Considering the threat of NPAs and wilful defaults, the scope of reporting could also be extended to regional rural banks, local area banks and non-banking financial companies (NBFCs), they added.

A senior NBFC executive said so far, NBFCs weren’t part of the reporting framework, but the new guidelines for early detection and resolution of stressed assets had seen a start in this regard.

From April 1 this year, NBFCs had to inform RBI of loans for which payments were due for 31-60 days (special mention account 1, or SMA1, category) and 61-90 days (SMA2 category). Also, these entities had to be part of a joint lenders’ group set up to frame a corrective action plan for borrowers.


Finance companies are still not required to declare borrower who is defaulter as willful defaulter and report it to the regulator.

Happy Vinayagar Chathurthi !

Recovering cheque-bounce money to get more tedious

Dhananjay Mahapatra, TNN | Aug 9, 2014, 02.30AM IST

NEW DELHI: Recovering money if a cheque bounces will now be a lot more tedious and costly. 

In a landmark judgment, the Supreme Court has changed the ground rule under Section 138 of Negotiable Instruments Act to prosecute a person who had presented the cheque which bounced for insufficiency of funds. 

Earlier, a case under Section 138 could be initiated by the holder of the cheque at his place of business or residence. But, a bench of justices TS Thakur, Vikramjit Sen and C Nagappan ruled that the case has to be initiated at the place where the branch of the bank on which the cheque was drawn is located. 
This means, if a man from Delhi gave a cheque drawn on a Delhi bank for buying something in Chennai and it bounced for insufficiency of funds, then the aggrieved person will have to travel all the way from Chennai to Delhi to initiate prosecution under Section 138.
And the judgment would apply retrospectively. This means, lakhs of cases pending in various courts across the country would witness a interstate transfer of cheque bouncing cases. 

Writing the judgment for the 3-judge bench, Justice Sen said: "We are quite alive to the magnitude of the impact that the present decision shall have to possibly lakhs of cases pending in various courts spanning across the country." However, the court said that in those cases where recording of evidence has started after issuance of summons to the accused, would continue to be tried at the place they were instituted. 

"To clarify, regardless of whether evidence has been led before the Magistrate at the pre-summoning stage, either by affidavit or by oral statement, the complaint will be maintainable only at the place where the cheque stands dishonoured," the bench said. 

The bench said: "In this analysis, we hold that the place, situs or venue of judicial inquiry and trial of the offence must logically be restricted to where the drawee bank is located." 

"An interpretation should not be imparted to Section 138 which will render it as a device of harassment, that is, by sending notices (about the bouncing of cheque under Section 138) from a place which has no casual connection with the transaction itself, and/or by presenting cheques at any of the banks where the payee may have an account," the bench said. 

"It is also now manifest that traders and businessmen have become reckless and incautious in extending credit where they would heretofore have been extremely hesitant, solely because of the availability of redress by criminal proceedings," the bench said referring to the rapid increase in institution of cases under Section 138 of NI Act after it was made a criminal offence. 

"Today's reality is that every magistracy is inundated with prosecutions under Section 138 of the NI Act, so much so that the burden is becoming unbearable and detrimental to the disposal of other equally pressing litigation," the court said. 

The court said for filing a criminal case under Section 138 NI Act, the holder of the cheque must have to travel to the place where the branch of the bank on which the cheque was drawn is located. In the alternative, he could institute a case under Section 420 (cheating) at the place of his residence or where he ordinarily carries out business. 

"If the payee succeeds in establishing that the inducement for accepting a cheque which subsequently bounced had occurred where he resides or ordinarily transacts business, he will not have to suffer the travails of journeying to the place where the cheque has been dishonoured," it said. 

"All remedies under the IPC and Crpc are available to such a payee if he chooses to pursue this course of action, rather than a complaint under Section 138 of NI Act. And of course, he can file a suit for recovery wherever the cause of action arises dependent on his choosing," the court said.

Under greater scrutiny, banks’ stressed asset sales to ARCs rise sharply

 George Mathew | Mumbai | August 25, 2014 8:53 am

With the CDR (corporate debt restructuring) route now coming under tighter regulatory monitoring, banks seemed to have found a new window to evergreen their stressed assets — asset reconstruction sector.

The Reserve Bank of India (RBI) has said that banks sold stressed assets worth Rs 16,960 crore in 2013-14 as against just Rs 1,320 crore in the previous year.

In the first quarter of 2014-15, banks have sold over Rs 15,000 crore to ARCs, almost equivalent to the full year’s figure last year. The full year of 2014-15 may witness asset sales of Rs 50,000 crore, say investment banks like Credit Suisse.

The RBI is not happy with the new trend. “The improvement in NPAs during Q4 of 2013-14 needs to be cautiously examined in the face of the increased offload of loans to asset restructuring companies (ARCs) by banks,” the RBI said in its Annual Report.

Out of Rs 16,960 crore asset sales in  2013-14, Rs 15,470 crore was accounted by public sector banks. Mega asset sales involving Bharati Shipyard (Rs 8,000 crore) and Hotel Leela (Rs 4,000 crore) were reported in the first quarter of this year.

Why are banks suddenly attracted to offloading of loans to ARCs? According to the RBI’s Financial Stability Report, as most of the securitisation activity is taking place predominantly with the issuance of securities receipts (SRs) rather than cash, there is concern that banks may tend to use this option to evergreen their balance sheets. SRs may not carry the stigma of non-performing assets (their value mainly being derived from the collateral and not based on the record of recovery), although the risk of loss of income on the asset still remains, in effect, with the originator, i.e., the bank.

Earlier this month, tightening the norms, the Reserve Bank increased the mandatory minimum holding in securities receipts from 5 per cent of the securities receipts issued by them to 15 per cent of the securities receipts of each class in each scheme, while granting them more time for due diligence.

This means banks will get 15 per cent as cash which can be added to the P&L account and the balance will be given by the ARC over a period of eight years depending on the recovery.

Massive corporate debt restructuring and asset sales to ARCs have aided banks to reduce the NPA level marginally. Gross NPAs increased from 2.4 per cent of gross advances in March 2011 to 4.4 per cent in December 2013, before declining somewhat to 4.1 per cent in March 2014.

The RBI said the ‘real’ incremental value addition of ARCs in the process of ‘reconstruction’ of assets, over banks’ traditional skills and informational advantage (stemming from their credit appraisal, monitoring and recovery processes) needs to be assessed. Further, as the banking industry has a significant stake in the ownership of most of the ARCs presently functioning in India, the spread of risks may not be taking place effectively, it said.

6 துறைகளின் வாராக்கடன் 36 சதவீதம்: ரிசர்வ் வங்கி

தி இந்து:செவ்வாய், ஆகஸ்ட் 26, 2014

வங்கிகளின் மொத்த வாராக் கடனில் 36 சதவீதம் 6 துறைகளால் ஏற்பட்டுள்ளது என்று ரிசர்வ் வங்கி வெளியிட்ட ஆண்டறிக்கையில் குறிப்பிடப்பட்டுள்ளது. கட்டமைப்பு, உலோகம், ஜவுளி, ரசாயனம், பொறியியல் மற்றும் சுரங்கத் தொழில் ஆகியவை வாராக் கடன் அளவு உயர காரணமாக இருந்துள்ளதாக தகவல்கள் தெரிவிக்கின்றன.

வாராக் கடன் அளவு 4.1 சதவீதமாக உயர்ந்துள்ளது. முந்தைய ஆண்டில் இது 3.4 சதவீதமாக இருந்தது. முன்னுரிமை தொழில்களுக்கு அளிக்கப்பட்ட கடன் தொகையில் வாராக் கடன் அளவு முந்தைய ஆண்டுடன் கடந்த நிதி ஆண்டில் குறைந்துள்ளதாக அறிக்கை தெரிவிக்கிறது.. கடன் வழங்குவதற்காக ஒதுக்கப்பட்ட அளவில் இத்துறைக்கு 30 சதவீதம் வழங்கப்பட்டுள்ளது.

கடந்த சில ஆண்டுகளாக முன்னுரிமை அல்லாத துறைகள் வங்கிகளில் கடன் பெற்றுவிட்டு செலுத்தாத நிலை தொடர்கிறது. வங்கிகளின் செயல்பாட்டு அமைப்பையே இது சிதைக்கும் வகையில் உள்ளது என்று ஆர்பிஐ அறிக்கை குறிப்பிடுகிறது.

வங்கிகளின் சொத்து விற்பனை மூலம் மார்ச் காலாண்டில் திரட்டப்பட்ட தொகை ரூ12,710 கோடியாகும். முந்தைய காலாண்டில் இது ரூ. 3,570 கோடியாக இருந்தது. வெளிநாட்டு வங்கிகளின் வாராக் கடன் அளவும் 3 சதவீதத்திலிருந்து 3.9 சதவீதமாக உயர்ந்துள்ளதாக ஆர்பிஐ வெளியிட்ட அறிக்கையில் குறிப்பிடப்பட்டுள்ளது.

Bigger than Sahara: PACL told to return whopping Rs 50,000 cr to investors in illicit scheme

FBZ 23 Aug 2014

 In its biggest-ever crackdown on a large-scale illicit money pooling scheme estimated at nearly Rs 50,000 crore, regulator Sebi today ordered immediate closure of unauthorised collective investment schemes run by PACL Ltd and refund of investors' money within three months.

Besides, the capital markets regulator also said it is initiating further proceedings against the company and its nine promoters and directors for fraudulent and unfair trade practices, as also for violation of Sebi's CIS Regulations, among others, as per a direction from the Supreme Court.

As per Sebi's 92-page order, the total amount mobilised by the company, "by its own admission" comes to a whopping Rs 49,100 crore and "this figure could have been even more if PACL would have provided the details of the funds mobilized during the period of April 1, 2012 to February 25, 2013".

The number of customers through which the money could have been collected is estimated at around 5.85 crore, which includes the customers who said to have been allotted land and who are yet to be allotted the land, Sebi said.

This is the biggest ever amount, as also the largest number of investors, so far involved in a case found to be unauthorised 'collective investment scheme' by regulator Sebi.

Among others, PACL and its top executives, including Nirmal Singh Bhangoo, are being probed by CBI as well.

Besides, this is is also one of the longest-running cases under the scanner of Sebi, which had first intimated PACL more than 16 years ago way back in February 1998, that it could "neither launch any new schemes nor continue raising funds under its existing schemes."

While the company maintained that it was not running any illicit scheme and was in fact engaged in the business of sale and purchase of land, Sebi issued a notice in November 1999 to PACL, alleging that it "was operating CIS, wherein the funds of the investors were pooled and utilized towards the cost of
land, registration expenses, developmental charges and other incidental expenses."

The case later went to courts, while the Supreme Court passed an order in February last year directing Sebi to determine whether the business of PACL fell within the purview of CIS or not, and accordingly take further action in accordance with the law.

Promoters and directors of PACL Ltd have been involved with Pearls Group and PGF Group, among others.

PTI

How PACL ran a Rs 50,000 cr ponzi scheme

FBZ 26 Aug 2014

So another Ponzi scheme has been busted.

The Securities and Exchange Board of India(Sebi) in an order issued on August 23, 2014, banned Delhi based PACL, from collecting any more money from investors. Sebi also asked PACL to refund the money to investors over the next three months.

A Ponzi scheme is essentially a fraudulent investment scheme in which money brought in by new investors is used to redeem the payment that is due to existing investors. The instrument in which the money collected is invested appears to be a genuine investment opportunity but at the same time it is obscure enough, to prevent any scrutiny by the investors.

In case of PACL, the money collected was supposedly invested in “ agricultural land”. As the Sebi order on the company written by Whole Time Member Prashant Saran points out “According to PACL, it mainly deals in the sale and purchase of agricultural land and development of the land...PACL's business model is not limited to simple trading in barren agricultural land but to provide significant value addition to such low value barren land by developing it into productive agricultural land.”

This land bought by PACL after collecting money from the investors wasn't handed over to them. As the Sebi order points out “PACL has also submitted that only symbolic possession of plots are handed over to the customers as fragmentation of land/ plot into smaller sizes may not be practical or permissible under the applicable revenue laws.”

The Sebi order goes on to inform that till March 31, 2012, Rs 44,736 crore was invested in PACL schemes. The company further informed Sebi that Rs 4,364.78 crore was collected by it between February 26, 2013 and June 15, 2014. Hence, the total amount collected amounts to a whopping Rs 49,100 crore. “This figure could have been even more if PACL would have provided the details of the funds mobilized during the period of April 01, 2012 to February 25, 2013,” the Sebi order points out.

The order goes on to note that “from the available records, it is also noted that since inception till 2012, PACL has allotted land to about 1.22 crore customers.” PACL also informed Sebi that the company has more than 4.63 crore customers to whom land hasn't been allotted. Hence, “the total number of the customer of PACL comes to around 5.85 crore.”

To summarize, the company has close to 5.85 crore customers who have invested around Rs 50,000 crore with it. This is the basic back story of PACL, which has been put together brilliantly by Saran in the Sebi order. So what are the holes in this story?

First and foremost if the company has Rs 50,000 crore invested with it, it must have used that money to buy “agricultural land” worth a similar value. But the Sebi order clearly points out that PACL hasn't done so. “The company has only lands worth Rs 11,706.96 crore [i.e. agricultural lands (Rs 7,322.11 crores) and commercial lands (Rs 4,384.84 crores)] out of which it has not only to satisfy the claim of 4.63 crore customers who have deposited Rs 29,420 crore with it but also to satisfy 1.22 crore customers to whom the land has been allotted but sale deeds have not been executed.”

PACL claims to have more land but hasn't been able to share those details with Sebi “In view of the above, the proposal does not appear to be serious and reasonable,” writes Saran of Sebi. This throws up several questions? If the company has land worth Rs 11,706.96 crore only, where is the remaining money that it has raised from its customers? Why hasn't it been invested?

Further, how does it plan to repay the customers at the end of the tenure of their investment? The customers have been promised a certain rate of return. And that return can be paid only when the land which PACL claims to invest in grows in value. But without the company investing money in land, that isn't going to happen.

Also, at the end of the tenure of his investment, the investor either has the option of taking land or money. Saran of Sebi had asked PACL to provide him a sample of 500 customers. From this sample, 421 customers had taken their money back. The question is how were these customers repaid if the money being raised is not being invested totally?

In fact, in a news report published in The Economic Times in June 2011 PACL director S Bhattacharya had said that “about 80% of customers opt to take the money at the end of the plan term instead of the plot of land they supposedly paid for.” So the remaining 20% must be taking on the land, they had originally invested in, is a fair conclusion that one can draw. But as the Sebi order also points out “Not a single applicant out of the 500 samples selected has registered a sale deed of the land he had proceeded to purchase in the first instance...These facts raise serious doubt the real estate business that PACL claims to carry out.”

In fact, the situation gets even more intriguing when one considers the total number of investors in the scheme. As summarised earlier nearly 5.85 crore investors have invested around Rs 50,000 crore in the scheme. But interestingly Bhattacharya had told The Economic Times in 2011 that the “the company has no more than 50 lakh customers”. So how did the number go from 50 lakh to 5.85 crore in just over three years? Or like Sahara, PACL does not really know how many customers does it really have?

All these lacunae lead Saran to conclude that “the lack of maintenance of proper records/ data is a clear indication that the activities of PACL are in the nature of ponzi scheme.” Hence, like most Ponzi schemes which run for a while, the company over the years has managed to build in the minds of its customers some sort of a façade of a business model, where they make money by buying and selling agricultural land.

But the available data does not lead to that conclusion. What the company seems to have been doing is to take money from new investors and hand it over to the investors whose investment had been maturing. That was all it did. It did not have a business model. It was an out and out Ponzi scheme.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Rs1.44 trillion stuck as cases pile up at debt tribunals

In 2009, discount retailer Subhiksha went bust as India’s economic growth slowed in the face of the global financial crisis. Photo: Mint

With bad loans rising sharply and bankers turning tough on company founders, the number of cases being taken to debt tribunals is likely to rise

Vishwanath Nair |  Khushboo Narayan Live mint 22 Aug 14

Mumbai: In 2009, discount retailer Subhiksha Trading Services Ltd went bust as India’s economic growth slowed in the face of the global financial crisis.

The once celebrated retail venture, promoted by R. Subramanian, owed banksRs.750 crore. With the company unable to repay the money and little hope of a revival in its business, creditors approached a debt recovery tribunal (DRT)—the last refuge of banks seeking to recover funds from defaulters.

In 2010, 10 lenders, namely Development Credit Bank, Bank of India, Federal Bank Ltd, HSBC Holdings Plc.’s India unit, HDFC Bank Ltd, Bank of Baroda, Kotak Mahindra Bank Ltd, IndusInd Bank Ltd, Royal Bank of Scotland Plc.’s local arm and Yes Bank Ltd all filed cases with the Chennai DRT.

In the same year, another high-profile case, involving entertainment firm Pyramid Saimira Theatre Ltd, went to the Chennai DRT. In 2009, the Securities and Exchange Board of India (Sebi) found it guilty of inflating profits, forging documents and stock-price manipulation. Once again, lenders were left with no option but to approach the DRT, and IndusInd Bank and UCO Bank filed cases against Pyramid Saimira. The exact amount Pyramid Saimira owed creditors could not be ascertained.

Four years later, not a rupee has been recovered by lenders of either company.

“We have written off the loan and we do not expect much in terms of recovery,” said a lender to Subhiksha, who declined to be identified.

The two cases are among the 42,819 cases pending before the 33 DRTs in the country as of 31 March 2013—the latest data available in the public domain. The amount stuck is Rs.1.44 trillion and could rise further when more recent data is made available.

With bad loans rising sharply across the banking system over the last couple of years and bankers turning tough on company founders, the number of cases being taken to DRTs is likely to rise. As of 30 June, gross non-performing assets (NPAs) of 40 listed banks stood at Rs.2.52 trillion, up 21% from Rs.2.08 trillion a year ago.

But the track record of existing DRTs and the infrastructure provided to them has been anything but encouraging, as is evident from the number of cases still pending before them.

DRTs were first set up under the Recovery Of Debts Due to Banks and Financial Institutions Act, 1993, also known as the DRT Act. The DRT functions as a quasi-judicial body intended specifically for facilitating debt recoveries by banks. Under the existing norms, a DRT is supposed to dispose of a matter referred to it within 180 days of the receipt of an application.

But this rarely happens, said bankers and lawyers that Mint spoke to.

“There are a lot of problems with the DRTs. First, we need additional benches of DRTs to cope with the rising number of cases. Second, the DRT procedures need to be streamlined to prevent delays in disposing of a case”, said Supreme Court advocate and corporate lawyer H.P. Ranina.

Bankers say one of the biggest problems facing DRTs is the lack of sufficient staff. According to a finance ministry letter dated 18 December 2013, addressed to the registrar generals of all the high courts of India, vacancies for a presiding officer exist at DRTs in Chandigarh, Delhi, Jabalpur, Nagpur and Patna.

The letter, written by Rajeev Sharma, under secretary in the department of financial services, advised the registrars to set up a panel for any unforeseen vacancies that may come up by 30 September at a number of other centres including Ahmedabad, Bangalore, Chennai, Ernakulam, Hyderabad and Mumbai. A copy of the letter has been reviewed by Mint.

“How are cases supposed to be heard if there is no presiding officer at the DRT?” asked an official at a public sector bank on condition of anonymity.

The presiding officer hears the cases at DRTs, while all the other officials of the tribunals discharge their functions under the oversight of the presiding officer, according to the DRT Act.

Along with the lack of adequate staff, the heavy backlog of cases means these tribunals find it difficult to dispose of cases within the stipulated 180 days.

The three tribunals in Mumbai, for instance, had 3,632 cases pending as of 31 March 2013, involving loans worth Rs.43,400 crore. Kolkata’s three tribunals had a backlog of 11,212 cases with loans worth more than Rs.20,600 crore pending at the end of FY13.

K.K. Ganguly, a Kolkata-based lawyer who has represented several banks and borrowers at the DRT, said: “The tribunal here is overburdened with cases. Cases have been pending since 2001.”

Allahabad Bank’s case against Purbachal Traders, United Bank of India’s case against Emco Rubber Industries and ANZ Grindlays Bank’s case against Allied Engineers, all filed in 2001, are still being heard at the Kolkata DRT, information available on the tribunal’s website showed.

Ganguly said he has been fighting a case since 2001 involving a claim of Rs.31 lakh made by a public sector bank against a Kolkata-based company. “The case is still pending in the DRT. I won’t give you the name of the bank involved. It will open a can of worms,” he said.

“Borrowers eventually come to us for a one-time settlement after the case drags on for years. Often the settlement is much lower than the loans due to us. So the recovery which eventually happens is not because of the swift action of the tribunals, but because people get tired of waiting,” said a senior official at a Mumbai-based public sector bank on condition of anonymity.

Recognizing the need to strengthen the debt recovery process, the government has announced the setting up on more DRTs and is also working in strengthening debt recovery laws.

In his budget speech on 10 July, finance minister Arun Jaitley announced that six new DRTs would be set up in Chandigarh, Bangalore, Ernakulum, Dehradun, Siliguri and Hyderabad. The finance ministry is also working on improving debt recovery laws such as the Securities and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, so as to give more powers to lenders in dealing with defaults.

A new bankruptcy law may also be in the works. In a speech earlier this month, Reserve Bank of India governor Raghuram Rajan said India needs better laws to deal with companies that have gone bankrupt.

“We need a bankruptcy code. We need equity to be seen as equity and debt to be seen as debt. Today there’s a lot of confusion... We need that confusion to be changed,” Rajan said.