Co-operative banks are in terrible shape; account-holders will be at the receiving end. RBIshould act noe

Wednesday, April 13, 2011

Co-operative banks are in terrible shape; account-holders will be at the receiving end. RBI should act decisively, and soon

Source :Money life: Prof Anil Agashe:April 12, 2011 03:16 Pm

A number of co-operative banks in Maharashtra are saddled with bad debts. Political interference seems to have silenced the banking regulator. It is high time the RBI, and the shareholders & depositors of these beleaguered entities woke up  

Recent news reports suggest that there are nearly 28 co-operative banks in Maharashtra which are having large NPAs (non-performing assets) and negative net worth and are in a bad financial state. 

However, there is nothing new about this situation. A lot of such banks have collapsed in the recent past, and no doubt many more will in the future. The RBI (Reserve Bank of India) seems to be inactive instead of being proactive in making sure that these banks close down and are acquired by other banks to safeguard the interests of the depositors. 

There is a strange argument doing the rounds that if the RBI takes action (like declaring a moratorium on sick banks) there will be a run on most banks that are sick. If this happens, it will actually be a good thing. Instead of protecting weak banks for 'safeguarding' depositors, let the RBI merge them. 

The banking regulator seems to have forgotten the Vaidyanathan and Madhavan Committee recommendations. Most state governments have signed MoUs (memorandums of understanding) with the RBI and have given the regulator all powers for supervision of co-operative banks as far as banking regulations are concerned, though state governments still have powers over these banks as these banks are under the control of their respective Registrar of Co-operatives (ROCs). 

Now it seems that the RBI needs the consent of these ROCs for placing these sick banks under a moratorium. However, if such consent is not forthcoming due to political pressure-as many such banks are controlled by politicians-then the apex bank should go ahead and suspend the banking licenses of these banks unilaterally.

There is also the curious case of Pune-based Rupee Co-operative Bank. There was a run on this bank sometime in 2002 and the board of the bank was dismissed, and it was put under an Administrator. According to some banking professionals who were advising the administrators, they were appalled that no proper records were available and the bank was unable to prepare its financial statements. The bank needed to be put under moratorium at that time itself. 

After five years under the 'supervision' of these administrators, fresh elections were held for the board of directors and many who were responsible to get the bank into trouble in the first place were re-elected! 

Today the bank claims that it has made a profit of Rs28 crore for the year ending March 2011. It also claims that no loan granted over the last two years is an NPA. However, the fact remains that almost 46% of its advances are classified as NPAs and the bank has in the process negative net worth and thus has a negative Capital Adequacy Ratio which has to be 12% of weighted risk adjusted assets of a bank! 

It is high time the RBI took action instead of watching the situation "closely" and giving more time to the management.

The depositors of the bank have cause for worry. If the bank is put under moratorium for a long time like the Suvarna Sahakari Bank which remained under moratorium for two years before it was finally acquire by IOB (Indian Overseas Bank), then all the money of the depositors will get locked in the bank. Last time when there was a run on the bank, the depositors had panicked and stood in long queues to take out their money. 

However, as the RBI assured liquidity support and said there was no need to panic, the same depositors stood in long queues to re-deposit their money as the bank announced increased interest rates to lure the customers back. 

The simple rule in finance is a bad borrower is forced to pay an interest rate higher than the market rate as a reward for higher risk that an investor requires. However, most depositors do not even understand that when they put money in a bank; the bank is a borrower. Even today I am afraid that most depositors in this bank are unaware of the risk that they are facing!

And what about the shareholders? They too seem to be an ignorant, callous and ignorant lot. They have received no dividend for the past many years. Their shares have absolutely no value today. Even if the bank is merged with another bank, shareholders are not going to get any money as had happened in the case of Global Trust Bank.

It will be worthwhile to see what security the bank is holding against the accepted NPAs of Rs500 crore, and what is the value of these securities. My guess is that not much value can be realised. It will also be pertinent to find out if the bank has used the provisions of the SARFAESI Act, 2002, against its willful defaulting borrowers. This Act gives enormous powers to banks in recovering bad loans.  

We must force the RBI to give answers to these questions in the interest of shareholders and depositors.

However, let us also not have too much sympathy for the shareholders and depositors because they have not pressurised either the management or the regulators, for protecting themselves. Even God helps those who help themselves! 

Financial ignorance is not an insurance cover against getting your fingers burnt.

---Prof Agashe teaches at Symbiosis and other management schools in Pune

Government operationalises central registry to check frauds in loan cases

Source :BS Reporter / New Delhi April 1, 2011, 1:18 IST

The government on Thursday operationalised central registry to prevent frauds in loan cases involving multiple lending from different banks on the same immovable property.

Initially transactions relating to securitisation and reconstruction of financial assets and those relating to mortgage by deposit of title deeds to secure any loan or advances granted by banks and financial institutions would be registered in the central registry, the finance ministry said in a statement on Thursday.

The records maintained by the central registry would be available for search by any lender or any other person desirous of dealing with the property. 


Availability of such records is likely to prevent frauds involving multiple lending against the security of same property as well as fraudulent sale of property without disclosing the security interest over such property.




“A central database of security interests created over property as well as assignment of such security interest by way of securitisation or asset reconstruction will make the secured lending activity in the financial market safer for lenders. 


This will enthuse the secured creditors to provide credit to the productive sectors to help sustain the growth momentum of the Indian economy,” the statement said.


The Central Registry of Securitisation Asset Reconstruction and Security Interest of India, a government company, licensed under Section 25 of the Companies Act, 1956 has been incorporated for the purpose of operating and maintaining the central registry under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002).


In the Budget, Finance Minister Pranab Mukherjee had announced the registry would be operationalised by March 11.


 Notifications for establishment of the registry, to be operated and maintained by the said company and for the purpose of appointment of central registrar, were issued by the government on Thursday.


The central registry would be under the superintendence and direction of the Central Registrar.
National Housing Bank Chairman and Managing Director R V Verma would hold additional charge as the registrar of the Central Registry for a period of three months.


 He would also be the managing director and chief executive officer of the company.


The forms for registration and the fees for filing registration particulars as well as for taking a search in the Central Registry have been prescribed by Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Central Registry) Rules, 2011.

RBI scraps sick, weak tags for urban co-op banks/

Business Standard


The Reserve Bank of India (RBI) has scrapped the “weak” and “sick” tags for classifying financially unsound urban co-operative banks (UCBs) and will now classify them into four grades — I, II, III, IV.



It has also relaxed the norms for classification of the banks as “weak” (now Grade II and III banks).
Earlier, a UCB was classified “weak” if its capital to risk weighted assets ratio (CRAR) fell below 75 per cent of the minimum prescribed level; or its net non-performing assets (NPAs) amounted to 10 per cent or more but less than 15 per cent of net loans and advances as on March 31; or if it had shown net losses in operations for two of the last three consecutive financial years.


Now, a UCB is classified under Grade I (sound bank) if it complies with CRAR norms in the latest year; its net NPAs are less than 10 per cent of net loans and advances as on March 31; has a net profit for the financial year just ended; and has not defaulted in maintenance of cash reserve ratio (CRR)/statutory liquidity ratio (SLR) the previous year.


Banks will be classified Grade II, if they meet any one of the following norms: (i) CRAR is one per cent below the prescribed norm; or (ii) net NPAs are 10 per cent or more but below 15 per cent of net loans and advances as on March 31; or (iii) has incurred net losses for the financial year just ended; or (iv) has defaulted in maintenance of CRR/SLR the previous financial year.


Banks will be placed under Grade III if they meet any two of the following norms: (i) CRAR is below 75 per cent of the minimum prescribed level but 50 per cent or above; (ii) net NPAs are 10 per cent or more but less than 15 per cent of net loans and advances as on March 31; (iii) incurred net losses for two out of the last three consecutive financial years.


UCBs will be placed under Grade IV: (i) if their CRARs fall below 50 per cent of the minimum prescribed level; and (ii) net NPAs are 15 per cent or more of net loans and advances as on March 31; or (iii) they show net losses.

Banks to work on Koutons' debt recast proposal

BS Reporters / Mumbai March 26, 2011, 1:00 IST Apparel maker and retailer Koutons Retail’s proposal to recast its debt had been admitted by the corporate debt restructuring (CDR) cell, said banking officials in the know. SBI Capital Markets (SBI Caps) has been given the mandate to draft the recast scheme. Koutons is the second such financially-troubled major retailer to have done so, after Vishal Retail, which was admitted for CDR this year.  According to television reports, the company has nearly Rs 660 crore debt on its books, of which Rs 460 crore will go for CDR and Rs 200 crore will be non-CDR. The company is believed to have taken debt at 13-13.5 per cent interest rate. The banks with loan exposure to the Delhi-based retailer include Indian Overseas Bank, Allahabad Bank, IDBI Bank, ICICI Bank and Axis Bank. Its shares on Friday hit the upper circuit of 10 per cent following the reports. They closed at Rs 33.15 on the Bombay Stock Exchange.  Last year, there were reports of default on loan repayment, increase in pledging of promoters’ shares and suspension of the company’s fund-based facilities by rating company Icra. Following the reports, the company’s share price took a hit. Since September, its share price has fallen 87.7 per cent to Rs 33.15 from Rs 269. However, banking executives said Koutons’ account had not slipped to the sub-standard category. Details of the CDR package will be worked out over the next few days. SBI Caps has already prepared a rough package for the company, which includes debt repayment over nine years, including a two-year moratorium, according to the television reports. Executives at Koutons could not be contacted for comments. Koutons’ admission for CDR follows the company’s 18-month efforts to improve declining cash flows and stem losses, which arose due to inventory pile-ups and aggressive expansion. The company’s financial woes came to the fore when it posted a net loss of Rs 317.1 crore and total revenue of Rs 109.8 crore in third quarter of 201-11. Promoters, which own 32 per cent in the company, have pledged 97.99 per cent with the lenders. The company had closed more than 200 stores over the past 18 months and was in the process of closing 50-60 more to improve cash flows, Koutons Chief Financial Officer Ajay Mahajan had said last year.  “We are profitable enough to take care of our interest burden. Yet, there is some scope for efficiencies and savings in interest costs, as rates are relatively high at 14 per cent. We will work towards that,’’ Mahajan had said.

Forcible recovery of vehicles illegal

Source ;TNN, Mar 27, 2011, 04.57am IST

The National Commission and the Supreme Court have repeatedly held that the rule of law must prevail and it is illegal to use musclemen to forcibly take repossession of a vehicle when the borrower or the hire purchaser fails to pay the installments. 

Yet banks and finance companies continue to adopt strong-arm tactics to forcibly seize vehicles from borrowers who default in making payment. 

In order to try and circumvent the law, they have introduced a clause in the agreement that the vehicle can be repossessed for default in repayment of the loan amount. 

What is the validity of this clause? 

This interesting issue was decided on February 11 by the bench of Justice Batta and Vinay Kumar of the National Commission in the case of IndusInd Bank v/s Birendra Kumar Sinha.

Case Study: Sinha had taken a loan from IndusInd Bank for purchase of a Tata truck. The loan was required to be repaid in 48 installments of Rs 27,500 each. In July 2007 the vehicle was forcibly repossessed by the bank. When Sinha asked for its release, he was asked to pay the entire outstanding loan.

Sinha filed a complaint before the Dhanbad district forum. During the pendency of the proceedings under the Consumer Protection Act, the bank initiated arbitration proceedings without the permission of the consumer forum, despite Sinha protesting against it. The bank also sold the vehicle in auction.

The district forum upheld the complaint, observing that repossession of the vehicle was illegal as Sinha had already paid Rs 1,23,000 and a balance of merely Rs 43,495 was outstanding. The bank's appeal to the Jharkhand State Commission was dismissed, upholding the order of the district forum.

Defaulters dodge loan recovery law summons with High Court stay

Source : B L :S. Bridget Leena :Chennai, Jan. 3


 Has the SARFAESI Act, arguably the most important means of recovery of bad loans, been losing its teeth in recent times?


The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, acted as a powerful weapon for bankers to recover loans by auctioning the bad assets of the borrower in three months' time.


In comparison, the Debt Recovery Tribunal (DRT) and Lok Adalats take years to recover these loans.


According to Reserve Bank of India data, there has been a steady fall in the amount of bad loans recovered under SARFAESI Act, as a per cent of the total amount of bad loans involved under this channel — a trend seen between 2008-09 and 2009-10.



Stay from High Court


Mr A.K. Bansal, Executive Director, Indian Overseas Bank, said that big borrowers with outstandings of over Rs 10 crore, stall the bank's efforts in taking possession of assets under SARFAESI Act, by getting a stay from the High Court or the Debt Recovery Tribunal.

A senior General Manager of a public sector bank said that nine out of 10 borrowers, who have been issued notices under SARFAESI, take banks to DRT to buy time.



No civil court (with the exception of the High Court) has judiciary powers when it comes to SARFAESI Act (Section 34).



Under the Securitisation Act, banks should be able to recover their bad debt in three months' time (with a notice period of 60 days). However, due to a large number of cases pending with the judiciary, it takes close to a year or more before banks can take possession of the property for auction, said the General Manager.



Currently, Indian Bank has issued SARFAESI notices to about 10,000 bad loans amounting to Rs 1,000 crore.



Sluggish property market


Adding to the banks' woes is the sluggish nature of the property market in the last two years, due to which banks were unable to recover the loan amount from such auctions.


One and half years ago, a major bank could not find bidders at an auction for a property in Thyagaraja Nagar (T.Nagar), in the heart of Chennai, for Rs 1.5 crore. Today, the same property has been sold for over Rs 4 crore.

R B I bars ARCs from converting debt into equity

Source :live mint : Aveek Datta, aveek.d@livemint.com: Mar 28 2011. 1:00 AM IST



The regulator has told Arcil, India’s largest ARC, to
 refrain from such conversion till further notice.





India’s banking regulator has prohibited asset reconstruction companies (ARCs) from converting part of the stressed loans they buy from banks into equity, three people with direct knowledge of the development said.





It is common practice for some ARCs to convert a small portion of so-called non-performing assets (NPAs) acquired from banks into equity. This equity can be sold in the market when the affected company turns around.


A few months ago, the Reserve Bank of India (RBI) had written to the Asset Reconstruction Co. of India Ltd (Arcil), India’s largest ARC, asking it to furnish details of such conversions of debt into equity. 


The regulator has told Arcil to refrain from such conversions till further notice, a person familiar with the matter said. He did not want to be identified since the regulator’s note is not in the public domain.


S. Khasnobis, Arcil’s managing director and chief executive officer, confirmed that Arcil was not currently in a position to convert any debt into equity in assets it was trying to revive.
“The assets that we acquire from banks suffer from very high debt levels. We write off this debt to improve the valuation of the company. A portion of the debt is converted into equity, which can be sold in the market to recover a part of the debt forgone,” Khasnobis said explaining the need for ARCs to take equity participation in distressed assets.


Khasnobis termed conversion of debt into equity as a financial restructuring mechanism that could improve recovery from assets gone bad.


Arcil holds stakes in the range of 8.5-10% in several companies whose debt it has bought from banks. Though the letter was addressed to Arcil, the directive is applicable to other companies as well.


An email sent to RBI on Friday did not elicit any response.


There are 13 ARCs operational in India. The oldest among them, Arcil, began operations in 2003 and continues to be the market leader.


ARCs buy stressed assets from banks that want to get them off their balance sheets at a discount and make money by turning them around.


Till March 2010, ARCs had made investments of around Rs.2,000 crore in buying stressed assets. Typically, they buy stressed loans at 15-20% of their face value.


The heads of two other ARCs also confirmed that RBI has asked them not to take stakes in assets they are reviving.


Birendra Kumar, managing director and chief executive officer ofInternational Asset Reconstruction Co. Pvt. Ltd, said though the new contracts his company is signing to acquire assets include a provision for converting a portion of the debt into equity at a later stage, the provision would be subject to RBI’s approval.


“We are discussing the matter with them (RBI),” Kumar said.


Another person familiar with the development said in the absence of the possibility of such a conversion, some ARCs may prefer stripping assets and selling them or negotiating directly with the borrowers for a settlement. He, too, did not want to be named.


P.H. Ravikumar, managing director and chief executive of Invent Assets Securitisation and Reconstruction Pvt. Ltd, agreed that the bar on converting debt into equity could make it difficult for ARCs to revive distressed assets by infusing more capital.


Though ARCs could not pinpoint the exact reason behind RBI’s move, they said it might be to address concerns of the promoters of such distressed companies losing ownership to them.
Khasnobis stated Arcil’s intention wasn’t to take ownership of the company and conversion of debt to equity would just help them recover a part of the debt that they were forgoing.
“Otherwise, the benefit of the debt restructuring is captured only in the hands of the owners of the company, without any benefit to the debt holders who have taken losses,” Khasnobis said.


According to some other companies in the sector, however, prohibition on conversion of debt into equity would not have much impact on the way ARCs go about their business.


Ramesh Venkat, director of Reliance Asset Reconstruction Co. Ltd, a part of Anil Ambani-owned Reliance Capital Ltd, said there weren’t too many instances where an ARC would need to convert debt into equity.


Unless a distressed asset is being liquidated, an ARC could participate in the upside of a potential revival through other means, Venkat said.


“Infusion of capital by way of debt can sometimes serve as a motivation for a company to return to financial health quickly, as debt extended by ARCs is more expensive than bank debt,” Venkat said. “As for the ARC, they can charge a performance-linked success fee to participate in the upside.”


He added that in many cases, there was often a need for equity infusion into a company being rehabilitated, but that mostly came from sources such as private equity funds focused on distressed assets.