Watch out for any unpaid dues, taxes and society bills the previous owner could have defaulted on
Yogini Joglekar | Mumbai April 21, 2013 Last Updated at 21:27 IST
Shashi Nair, a Mumbai-based advocate, bought two houses in Chembur and Vasai in 2005 and 2010, respectively, through two different bank auctions. Nair purchased these properties from banks that opted to take recourse under Section 101 and the Debt Recovery Tribunal (DRT) Act.
The most common Acts under which banks take recourse are the DRT, state-specific Co-operative Housing Societies Act, and the Sarfaesi (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act.
The Sarfaesi Act, 2002, allows banks and financial institutions to auction properties (residential and commercial) when borrowers fail to repay their loans.
It helps banks reduce their non-performing assets (NPAs) by adopting such measures for recovery.
According to NPAsource.com, the net NPAs of 40 listed banks rose to Rs 92,398 crore in December 2012 from Rs 61,558 crore in March 2012. There were about 23,000 registered properties for auction, worth Rs 21,000 crore. Of these, 8,548 residential flats and 1,846 commercial properties are up for auction.
Ram Sangapure, general manager at Central Bank, says, "Most banks today recover their NPAs under the Sarfaesi Act, as it is faster, hassle-free, and empowers banks to do so without the intervention of the court."
Sanjay Dutt, executive managing director, South Asia, Cushman & Wakefield, says, "Usually, houses bought under the Sarfaesi Act are up to 15-30 per cent cheaper than the prevailing rates of homes in that area. This is because demand for such homes is low, as very few people know about this channel and also banks don't stress on a high price as long as they can recover their losses." Buying through this channel saved Nair as much as Rs 8-10 lakh than the prevailing rates in those areas. Valuations of bank-auctioned homes tend to be on the conservative side, as it is a distress sale.
Properties under Sarfaesi Act
If the borrower defaults on repayment of his/her home loan for six continuous months, banks give the borrower a 60-day period notice to regularise his repayments. If the borrower fails to do so, banks will issue another 30-day period notice. If the borrower doesn't pay even in this period, his or her loan would be declared an NPA. This is when banks will auction his mortgaged property to recover their loan.
Bank issues notice about possession
If the borrower still fails to repay the loan, the bank will take possession of the property that has been kept as mortgage or collateral. The bank can take the help of the police in case the borrower doesn't part with his property. After the property is under its possession, the bank will issue a notice in newspapers. This is when potential buyers should prepare themselves and wait for bank's auction-notice.
Wait for the auction-notice
The bank now hires a government-appointed valuer, who will value the property and arrive at a reserve price (RP) or a minimum bid price. It is a price below which the bank is not allowed to sell that property. If the price fetched exceeds the bank's dues, the excess amount is given to the borrower. Only after arriving at the reserve price, will banks advertise auction-notice. They can publish this only in one English and one regional newspaper, 30 days prior to the auction.
Since information about such notices is limited, one can also look at websites like foreclosureIndia.com and NPAsource.com. These portals give information about the latest properties that are up for auction by banks. However, to register on NPAsource.com, you will have to shell out Rs 18,000 annually to view some 1,000 NPA notices in a year across India.
How to participate in the auction
Interested bidders must submit their bids in a sealed envelope to the bank. Along with the bid, the bidder has to pay 'earnest money deposit'. This deposit is usually 5-10 per cent of the value of the property auctioned. However, this deposit will be refunded in case the bidder doesn't win the bid. Some banks may also charge a nominal fee as tender fees. On the auction day, the sealed envelopes are opened in front of the bidders and the highest bid is announced.
Bidders may or may not get another chance to revise their bids. If the bank has failed at achieving the reserve price, they may postpone the auction or even reduce the valuation of the property. This revision may take another two-three months.
What if you win the bid?:
You have to pay up to 25 per cent of your bid amount within 24 hours to confirm the purchase. The balance amount can be paid in a month or two. This time period given to the buyer varies from banks to banks.
R K Bansal, executive director (retail banking) at IDBI bank, says, "If the property value is huge, the buyer can negotiate with the bank and discuss the tenure within which he can pay the balance amount. The buyer can also get loan to buy that property, if he has a decent credit score."
Since the bank had previously lent against the property, there is clarity on property title. However, these properties are sold on an 'as-is' basis, which means the properties are sold just the way it had been possessed.
"Since the property has been possessed by the banker forcefully, there are chances there may be pending dues or even litigations. For instance, the owner may have some unpaid property taxes, electricity/water bills, society dues and so on. Hence, don't get carried away by the low price of the house, there are chances you may have to pay for such liabilities," says Anshuman Jagtap, advocate at Hariani & Co.
Banks may or may not have information about such liabilities, so it's best to hire a property lawyer and check for such loop-holes before finalising the deal.
http://www.business-standard.com/article/pf/bank-auctioned-homes-may-be-cheaper-113042100495_1.html
Monday, April 22, 2013
Tuesday, April 9, 2013
Foreclosureindia.Com Started E Auction Services For all Banks In India Thru BankAuctions.IN Portal
According
to Ministry of Finance, Government of India directives, All NPA’s shall be sold through E Auction
only. Free foreclosure listing service
provider, Foreclosureindia.com has
started secured portal BankAuctions.IN for providing E auction services to all
Banks, DRT’s to sell NPA’s online.
Foreclosureindia.com
is the one and only website in India listing the auction properties of all the
banks and financial institutions across India since Nov 2009. It's the first of
its kind internet portal that helps the buyers of property in getting the free
access to all auction property details / free foreclosure listings information
of banks and financial institutions happening in and around 34 major cities of
the country. During the last one year it has achieved its mile stone about
visitors and page views. The details are reported as detailed below.
No of total visits to the site -
1,343,374
No of unique visitors - 652,724
Total number of page views -10,458,830
Returning visitors -
52.05 %
Visitors came from -
45554 cities & from 212 countries.
Average viewer ship of each auction property listed is 485. Foreclosureindia.com has set a target of 100 %
growth during the present financial year.
The advantages of “e –
publicity” through it are explained
as detailed below.
- Free
access to all visitors, unlike some portals is charging Rs 1050 to 2500
per month to show the auction property details.
- E
mail alerts are being sent to 49000 plus registered users on daily basis.
- It
is displaying the Auction properties details in two other real estate
websites also, along with displaying in their portal.
E – Auctions may eliminate
cartelization and facilitates NRI’s to buy properties online. Foreclosureindia.com’s spokesperson informed
that “they have developed a fully secured online portal for E-Auctions as https://www.BankAuctions.IN. The
complete process from Creation of Events, submission of first round quotes by
bidders, evaluation and final auction will be done online to enable
transparency in transactions, strictly adhering to all the requirements of
Ministry of Finance. https://www.BankAuctions.IN has easy interface to enable all the investors / bidders with little knowledge
of Computer and internet to participate in these property auctions. It
maintains complete confidentiality & privacy for the bidders and Banks.
All
the Debt recovery tribunals are conducting E Auctions to sell secured
assets. A good number of Banks have adapted
to E auctions for selling of some of the NPA’s. Foreclosureindia.com has
started secured portal BankAuctions.IN for providing E auction services to all
Banks, DRT’s to sell NPA’s online to Indian Public and non resident Indians
working in different countries.
The State Bank of Hyderabad, ChaitanyaGodavari Grameena Bank, Guntur and Andhra Pradesh Grameena Vikas Bank, Warangal
has empaneled BankAuctions.IN for conducting E Auctions. More than 10 public
sector Banks & private sector Banks are processing their empanelment
requests for conducting E auctions. It
targets to conduct 6000 E Auctions of NPA’s during this year.
The
advantages of conducting E auctions through BankAuction.IN are explained as
detailed below.
- Success
rate of selling of properties will be more, as BankAuctions.IN is
providing wide publicity to NPA properties. Others are only conducting E auction.
- Price
for conducting E auction is lowest
when compared to all other service providers.
- Non
performing assets disposal is the only exclusive activity for BankAuctions.IN,
where as it is non core activity for other E Auction service providers.
ForeclosureIndia.com requests the Banks, DRT’s ,
Housing finance companies, State Finance corporations, all other Organizations
disposing of non performing assets under SARFAESI Act & DRT acts to utilize
their e publicity and also their E auction facilities.
Wednesday, March 27, 2013
Banks initiate crackdown on wilful defaultersTo recover dues from 50 top defaulters; finance ministry wants proceedings fast-tracked
Manojit Saha | Mumbai March 26, 2013 Last Updated at 00:54 IST
Government-owned banks have started cracking the whip on wilful defaulters, with the finance ministry asking them to recover dues from the top 50 defaulters as the first step. Banks have been asked to furnish the information of the top-50 immediately.
Wilful defaulters are those borrowers who have defaulted on loan repayment to banks despite having adequate cash flows and a healthy net worth. The ones who have not utilised the funds borrowed for specific purposes and diverted those for other purposes have also been categorised as wilful defaulters by the Reserve Bank of India (RBI).
The finance ministry has asked chief executives of public-sector banks to take approval of their boards and begin proceedings for penal measures. The ministry has also asked banks to lodge formal complaints against the auditors of the borrowers with the Institute of Chartered Accountants of India, if they find the auditors were negligent or deficient in conducting the duty. (UNDER STRESS)
The ministry’s directions have come against the backdrop of a rise in “compromises” made by banks in writing off loans. According to data compiled by the ministry, the reduction in banks’ non-performing assets (NPA) due to compromises made during write-offs was 33 per cent of the total reduction as of December-end, compared with 31 per cent as of March-end. The total NPA reduction by public-sector banks as of December-end was Rs 41,672 crore.
The ministry has also mandated banks not to provide any additional facility to these companies and to bar their promoters for five years from availing of institutional financing for floating new ventures.
Following the ministry’s directive, banks have formed committees — comprising chairmen, executive directors and government nominees — to update their respective boards on the matter.
“The finance ministry has also directed us to obtain all necessary powers to recover dues from such defaulters,” said a senior executive of a public-sector bank.
The move has come within days of Finance Minister P Chidambaram’s comments on the corporate sector’s wilful defaulters. He had said after a meeting with chiefs of public-sector banks last week: “We cannot have an affluent promoter and a sick company.”
The government – the owner of public-sector banks – has been pushing for recovery of non-performing loans. Banks have also been asked to have a board-approved policy on loan recovery and to conduct a review of NPA accounts — of Rs 1 crore and more by the board of directors, and top-300 by the board’s management committee.
* Wilful defaulters are those borrowers whoh defaulted on loan payment to banks despite having adequate cash flows and healthy networth
* No additional loans facilities to defaulters
* Banks to bar promoters of defaulting companies from institutional finance for floating new ventures for a period of 5 years
* About a third of NPA reduction is due to comprise while writing off a loan
* Banks to form board level committee to monitor recovery process of willful defaulter
Government-owned banks have started cracking the whip on wilful defaulters, with the finance ministry asking them to recover dues from the top 50 defaulters as the first step. Banks have been asked to furnish the information of the top-50 immediately.
Wilful defaulters are those borrowers who have defaulted on loan repayment to banks despite having adequate cash flows and a healthy net worth. The ones who have not utilised the funds borrowed for specific purposes and diverted those for other purposes have also been categorised as wilful defaulters by the Reserve Bank of India (RBI).
The finance ministry has asked chief executives of public-sector banks to take approval of their boards and begin proceedings for penal measures. The ministry has also asked banks to lodge formal complaints against the auditors of the borrowers with the Institute of Chartered Accountants of India, if they find the auditors were negligent or deficient in conducting the duty. (UNDER STRESS)
The ministry’s directions have come against the backdrop of a rise in “compromises” made by banks in writing off loans. According to data compiled by the ministry, the reduction in banks’ non-performing assets (NPA) due to compromises made during write-offs was 33 per cent of the total reduction as of December-end, compared with 31 per cent as of March-end. The total NPA reduction by public-sector banks as of December-end was Rs 41,672 crore.
The ministry has also mandated banks not to provide any additional facility to these companies and to bar their promoters for five years from availing of institutional financing for floating new ventures.
Following the ministry’s directive, banks have formed committees — comprising chairmen, executive directors and government nominees — to update their respective boards on the matter.
“The finance ministry has also directed us to obtain all necessary powers to recover dues from such defaulters,” said a senior executive of a public-sector bank.
The move has come within days of Finance Minister P Chidambaram’s comments on the corporate sector’s wilful defaulters. He had said after a meeting with chiefs of public-sector banks last week: “We cannot have an affluent promoter and a sick company.”
The government – the owner of public-sector banks – has been pushing for recovery of non-performing loans. Banks have also been asked to have a board-approved policy on loan recovery and to conduct a review of NPA accounts — of Rs 1 crore and more by the board of directors, and top-300 by the board’s management committee.
* Wilful defaulters are those borrowers whoh defaulted on loan payment to banks despite having adequate cash flows and healthy networth
* No additional loans facilities to defaulters
* Banks to bar promoters of defaulting companies from institutional finance for floating new ventures for a period of 5 years
* About a third of NPA reduction is due to comprise while writing off a loan
* Banks to form board level committee to monitor recovery process of willful defaulter
http://www.business-standard.com/article/finance/banks-start-crackdown-on-wilful-defaulters-113032500424_1.html
Tuesday, March 19, 2013
Banks must take firm steps to recover NPAs: FM
NEW DELHI, March 18, 2013, DHNS:
Soared to Rs 1.55 lakh cr as of Dec 2012
Concerned over the rising bad loans of public sector banks, Finance Minister P Chidambaram on Monday said the lenders must take firm steps to recover non-performing assets (NPAs) without hurting industry.
“While we understand why NPAs have risen and the restructured accounts have risen, we also wish the banks to take strong steps to recover their dues, I think the promoters have a duty to bring in additional money and the companies have a duty to pay their dues to banks. We cannot have an affluent promoter and a sick company,” Chidambaram told reporters after meeting heads of PSU banks and financial institutions.
Slow economic growth and inability of companies to payback their loans have contributed to increase in non-performing assets of the banks. This has also given rise to large scale debt-restructuring by banks.
Gross NPAs of PSU banks have risen from Rs 71,080 crore as on March 2011, to Rs 1.55 lakh crore as on December 2012. Chidambaram also said that as many as 215 infrastructure projects across five sectors worth Rs 7 lakh are facing delays, underscoring the slow pace of implementation of industrial projects in the country.
He, however, said that certain projects in iron and steel and coal sector have started moving of late. The real problem exists in road and power projects. There are about 68 new projects in the road sector while 40 in power sector are either not moving or moving at a slow pace. “We have to get them going,” he added.
Such projects usually face hurdles due to delay in clearance from multiple authorities, leading to time and cost overruns. Analysts estimate that poor infrastructure facilities in the country remove about two percentage points from gross domestic product growth. The government has set up a ministerial panel to fast-track such projects.
Chidambaram also said that the finance ministry and the Reserve Bank of India are investigating the money laundering allegations made against three private-sector banks, but no such complaint has been made against any state-run banks. On the tight cash situation of banks, the finance minister said that he was in talks with the RBI governor D Subbarao and that he expected the RBI to take steps to address the liquidity shortage in the banking system when it meets to review its monetary policy on Tuesday.
Chidambaram's remarks have renewed hopes among investors that the RBI will also cut the cash reserve ratio of banks to help them with adequate cash in hand.
“While we understand why NPAs have risen and the restructured accounts have risen, we also wish the banks to take strong steps to recover their dues, I think the promoters have a duty to bring in additional money and the companies have a duty to pay their dues to banks. We cannot have an affluent promoter and a sick company,” Chidambaram told reporters after meeting heads of PSU banks and financial institutions.
Slow economic growth and inability of companies to payback their loans have contributed to increase in non-performing assets of the banks. This has also given rise to large scale debt-restructuring by banks.
Gross NPAs of PSU banks have risen from Rs 71,080 crore as on March 2011, to Rs 1.55 lakh crore as on December 2012. Chidambaram also said that as many as 215 infrastructure projects across five sectors worth Rs 7 lakh are facing delays, underscoring the slow pace of implementation of industrial projects in the country.
He, however, said that certain projects in iron and steel and coal sector have started moving of late. The real problem exists in road and power projects. There are about 68 new projects in the road sector while 40 in power sector are either not moving or moving at a slow pace. “We have to get them going,” he added.
Such projects usually face hurdles due to delay in clearance from multiple authorities, leading to time and cost overruns. Analysts estimate that poor infrastructure facilities in the country remove about two percentage points from gross domestic product growth. The government has set up a ministerial panel to fast-track such projects.
Chidambaram also said that the finance ministry and the Reserve Bank of India are investigating the money laundering allegations made against three private-sector banks, but no such complaint has been made against any state-run banks. On the tight cash situation of banks, the finance minister said that he was in talks with the RBI governor D Subbarao and that he expected the RBI to take steps to address the liquidity shortage in the banking system when it meets to review its monetary policy on Tuesday.
Chidambaram's remarks have renewed hopes among investors that the RBI will also cut the cash reserve ratio of banks to help them with adequate cash in hand.
http://www.deccanherald.com/content/319847/banks-must-take-firm-steps.html
Wednesday, February 13, 2013
Credit Unworthy
Ill-behaved Indian borrowers will now find it tough to hide from authorities
Gross NPAs are expected to touch 3.5 per cent, and corporate debt restructuring, 5.7 per cent, of total advances in the banking industry in 2012/13. Loans and advances in the system stood at Rs 50.74 trillion (a trillion equals 100,000 crore) in 2011/12.
Rudran's ARCIL so far has bought nearly Rs 50,000 crore worth of NPAs in the past decade.
"No one borrows money to default, and not all NPAs are wilful defaults," says S. Ravi, who runs a chartered accountancy firm in South Delhi, and also sits on the board of IDBI Bank Ltd. "You have to separate the wheat from the chaff," he adds.
Ravi's argument can be justified, as even good borrowers can get trapped in NPAs because of ups and downs in the economy, a sudden rise in interest rates, inflation and other reasons beyond their control.
But Indian borrowers can be reckless, too. The track record suggests that a part of stressed assets turns into wilful defaulters. The value of suits filed against defaulters has more than doubled in five years to reach Rs 23,439 crore in 2011/12.
The alarming trend of borrowers disposing of assets prompted the Reserve Bank of India (RBI) to expand the definition of 'wilful defaulter'. Before 2008, it simply meant someone who had the capacity to repay, or who diverted or siphoned off borrowed money. Now, the definition includes promoters who dispose of collateral assets without the knowledge of the lending bank.
Another symptom of bad credit behaviour is the over four million cases of bounced cheques - mostly retail - pending in the courts. The volume of bounced cheques is equivalent to the volume of cheques issued every month in a city the size of Ahmedabad, Bangalore or Kolkata.
Do Indians have a cavalier attitude towards timely payment ? Some in the industry believe so. For example, global credit insurer Atradius, present in India for well over a decade, has documented payment delays in the country, and found that business-to-business payment delays of more than three months stood at 8.4 per cent of domestic invoices in November 2012 - well above the Asia average of 5.5 per cent. And the value of uncollectable (written off) business-to-business receivables was 7.5 per cent in India, compared to the Asia average of 5.3 per cent.
This would make any foreigner hesitate to do business with Indian promoters. "We have seen delays in the IT sector or amongst the small and medium enterprises," says Arun Rajan, country manager, Atradius.
This bad payment habit extends to bank loans. Even some young borrowers, such as students, default, in their first relationship with a bank. Today, gross NPAs in education loans are over seven per cent of advances. As that number is rising, banks are going slow on education loans. Former finance minister Pranab Mukherjee had even proposed a credit guarantee fund to compensate the banks, but it never materialised for lack of budgetary allocation. RBI Deputy Governor K.C. Chakrabarty highlighted the problem of student loan defaults during a lecture at the Noida-based JRE School of Management last year. "I suggest school alumni associations should become active in inculcating ethics and values among students," he said.
Sudip Bandyopadhyay, former CEO of Reliance Money, who now runs a firm called Destimoney Securities Pvt Ltd, says students are not mature borrowers. "Also, many times, the placement is not commensurate with the money spent on a course," he says.
Bankers say students sometimes leave the country without paying up. "We don't have a good tracking system - it is still evolving," says IDBI's Ravi. Some experts suggest that banks could reach out to such defaulters through their parents or by coordinating with immigration authorities.
Another area where borrowers often behave erratically is credit cards. Bankers have turned extremely cautious here: RBI data shows that the number of credit cards actually fell from 23.1 million in March 2007 to 17.7 million in March 2012. Card spend has, however, increased from Rs 41,400 crore to Rs 96,600 crore. "It is better to have a few good customers than many bad ones," says Bandyopadhyay of Destimoney. Bankers say nonsalaried people with an irregular income are more likely to default.
Foreign banks and their non-banking arms, too, have had bitter experiences in consumer finance after the economic downturn in 2008. Fullerton India, a non-banking finance company (NBFC) backed by Singapore-based Temasek Holdings, started with a nearly 90 per cent unsecured lending portfolio around five years ago. It suffered huge losses in the unsecured segment, with gross NPAs rising to over 10 per cent in the overall business. Since then, it has cut its exposure to half in the unsecured segment, especially personal loans.
The only disciplined borrowers, data suggests, are mortgaged borrowers. "We haven't seen people not paying up on a home or car loan in India," says Arun Thukral, CEO of the 12-year-old Credit Information Bureau (India) Ltd, or CIBIL. The bureau keeps records of all banks' borrowers, assigning each a credit score between 300 and 900, where 900 indicates the best repayment behaviour. The score helps a new lender assess the credit behaviour of an individual or company.
Thukral points out that Indians are not as leveraged as borrowers in the US or UK, but adds that credit tracking infrastructure is well developed in those countries, recovery mechanisms are more robust and borrowers are mature enough to admit to mistakes. "Post-2008, we all heard the stories of people leaving their cars on the road or abandoning their well furnished flats for bankers to repossess," says Bandyopadhyay. ARCIL's Rudran says he is not hopeful of such behaviour in India any time soon.
The lack of credit tracking infrastructure in India until recently has contributed to borrowers' lax attitude towards financial obligations. "There was always another bank ready to welcome you with open arms," says a banker who does not want to be named.
CIBIL is still struggling to rope in many institutions to get a better picture of credit behaviour. Four leading cooperative bank associations in Maharashtra joined CIBIL 10 long years after it was set up. "Politicians sell the loan waiver carrot, advising farmers not to repay banks," says an NBFC official who travels extensively in rural India. Banks are wary of lending to farmers as this segment has a history of default.
Sanjay Agarwal, group head for retail business at ARCIL, says there is a tendency in India to resort to litigation to scuttle the recovery process. For instance, he says, as soon as ARCIL buys an NPA from a bank, the borrower approaches the court, challenging the asset transfer.
"There are cases that are unresolved for more than eight years," says ARCIL's Rudran. "Asset recovery is a very tough business. You have to find out new methods to deal with rogue borrowers." He adds that defaulters often make all sorts of excuses and try to stymie the recovery process by approaching the courts.
"The borrower also uses indirect pressure from influential people," says a banker in the NPA department of a public sector bank who has received many calls from politicians. Deepak Gupta, Joint Managing Director, Kotak Bank - one of the few banks that specialise in buying NPAs from other banks - concurs, saying: "Most corporate default cases get resolved only through courts."
The courts are flooded with such cases. Take, for example, litigation between companies and banks over forex derivatives contracts. Many midsize exporters and importers who hedged their foreign currency risk suffered losses when the rupee-dollar rate moved beyond their comfort zone. Companies that had foreign currency exposure blamed the banks for mis-selling, and banks countered by saying the companies had failed to read the fine print. In November last year, the Supreme Court settled the wrangle by ruling that 'wilful default' covers not only normal banking transactions such as borrowing and lending, but also derivatives contracts. The borrowers lost, and bankers can now go after defaulters in derivatives contracts.
Another reason for bad behaviour by borrowers is the multiplicity of lenders. Apart from banks, there are NBFCs of varying shapes and sizes, microfinance institutions, district cooperative banks and regional rural banks and unregistered sources. At a recent seminar, Anand Sinha, another RBI Deputy Governor, cited the example of Andhra Pradesh, where microfinance institutions lent indiscriminately. "This would not have reached the proportions it did if there was information-sharing amongst MFIs," says Sinha.
CIBIL's Thukral says the bureau is gradually helping improve the credit culture, as more and more people are aware that a bad credit history can mean trouble. Banks put credit bureau reports at the top of their checklist. "If fresh loans won't go to bad borrowers, it naturally improves the culture," says Thukral.
With the role of credit reports becoming more important, some see a business opportunity. Two Mumbai-based entrepreneurs have set up Credit Sudhaar, a startup that offers advisory services to improve one's credit score. "Our clients are not only those who made a mistake in the past, but also those who want to maintain a good credit score," says co-founder Arun Ramamurthy, who formerly worked with Citibank.
CIBIL's Thukral says it is a reflection of growing awareness that hassled borrowers sometimes walk in or call CIBIL's helpline to discuss negatives in their report. "The cultural fabric of India is very different from the West," says Thukral. "Our parents and grandparents keep reminding us: jitni chadar ho utnay hi paon phelane chahiye (stretch your legs only as far as your blanket will go)."
Today, the CIBIL effect is not restricted to borrowing . A European bank in India, for example, requires job applicants in India to submit credit reports before it offers them a job. A professional who works for a private company and does not wish to be identified, said his friend was asked for a credit report when he approached Delhi Public School for admission for his daughter.
The possibilities for rogue borrowers to hide are shrinking. Taking the locks off a door or moving to another city won't work much longer. Time to check your credit score.
One morning, two years ago, when the officials of the Asset Reconstruction Company of India Ltd (ARCIL), which buys and sells bad loans acquired from banks, turned up at a Bangalore housing complex to repossess a defaulter's flats, they were nonplussed. The defaulter's tenants - a police inspector, a politician and a small-time businessman - were all influential. One had removed all the locks on the outside of the front door. Despite the backing of an order from the chief metropolitan magistrate and a team of cops, the ARCIL officials could do little but request the tenant to open the door. Morning passed into afternoon, and finally the police decided to smash in the door. Alarmed by the noise, the tenant finally opened it. The second tenant threatened the ARCIL team with dire consequences. The third threatened to commit suicide. "We persisted with our request for the lease agreements executed by the defaulting borrower," says an ARCIL official. But the tenants cited the law to prevent the officials from entering the flats. After much discussion, the tenants sought 10 days to find other accommodation, and promised in writing to vacate.
The story did not end there.
"We granted them the time, as the police also advised us," the ARCIL official said. But the very next day, the tenants obtained a temporary stay on the repossession order, from the debt recovery tribunal. The ARCIL officials are still doing the rounds of the court to repossess the flats.
There is no dearth of stories about defaulters using every means possible to scuttle the legal process. A jewellery exporter offered disguised copper alloy as part of the collateral for a loan, and later sued the bank for his 'missing' gold. In another case, ARCIL had to arrange a contingent of 200 policemen and private security guards to repossess a textile manufacturing company's factories.
"We end up getting the most difficult borrowers," says P. Rudran, Managing Director and CEO, ARCIL. Bankers tend to sell whatever they cannot recover on their own, he explains.
The concept of focused asset reconstruction companies for the recovery of non-performing assets (NPAs) was born in early 2000 to help banks. The 63-year-old Rudran, who operates from a tenth-floor office in a suburban Mumbai tower, has his work cut out, judging by the mounting NPAs in the banking system.
The story did not end there.
"We granted them the time, as the police also advised us," the ARCIL official said. But the very next day, the tenants obtained a temporary stay on the repossession order, from the debt recovery tribunal. The ARCIL officials are still doing the rounds of the court to repossess the flats.
There is no dearth of stories about defaulters using every means possible to scuttle the legal process. A jewellery exporter offered disguised copper alloy as part of the collateral for a loan, and later sued the bank for his 'missing' gold. In another case, ARCIL had to arrange a contingent of 200 policemen and private security guards to repossess a textile manufacturing company's factories.
"We end up getting the most difficult borrowers," says P. Rudran, Managing Director and CEO, ARCIL. Bankers tend to sell whatever they cannot recover on their own, he explains.
The concept of focused asset reconstruction companies for the recovery of non-performing assets (NPAs) was born in early 2000 to help banks. The 63-year-old Rudran, who operates from a tenth-floor office in a suburban Mumbai tower, has his work cut out, judging by the mounting NPAs in the banking system.
Arun Thukral, CEO of credit tracker CIBIL, at Mumbai's busy Churchgate station. He says: 'A bad credit history can mean trouble. If fresh loans won't go to bad borrowers, it naturally improves the credit culture.
Gross NPAs are expected to touch 3.5 per cent, and corporate debt restructuring, 5.7 per cent, of total advances in the banking industry in 2012/13. Loans and advances in the system stood at Rs 50.74 trillion (a trillion equals 100,000 crore) in 2011/12.
Rudran's ARCIL so far has bought nearly Rs 50,000 crore worth of NPAs in the past decade.
"No one borrows money to default, and not all NPAs are wilful defaults," says S. Ravi, who runs a chartered accountancy firm in South Delhi, and also sits on the board of IDBI Bank Ltd. "You have to separate the wheat from the chaff," he adds.
Ravi's argument can be justified, as even good borrowers can get trapped in NPAs because of ups and downs in the economy, a sudden rise in interest rates, inflation and other reasons beyond their control.
But Indian borrowers can be reckless, too. The track record suggests that a part of stressed assets turns into wilful defaulters. The value of suits filed against defaulters has more than doubled in five years to reach Rs 23,439 crore in 2011/12.
The alarming trend of borrowers disposing of assets prompted the Reserve Bank of India (RBI) to expand the definition of 'wilful defaulter'. Before 2008, it simply meant someone who had the capacity to repay, or who diverted or siphoned off borrowed money. Now, the definition includes promoters who dispose of collateral assets without the knowledge of the lending bank.
Another symptom of bad credit behaviour is the over four million cases of bounced cheques - mostly retail - pending in the courts. The volume of bounced cheques is equivalent to the volume of cheques issued every month in a city the size of Ahmedabad, Bangalore or Kolkata.
Do Indians have a cavalier attitude towards timely payment ? Some in the industry believe so. For example, global credit insurer Atradius, present in India for well over a decade, has documented payment delays in the country, and found that business-to-business payment delays of more than three months stood at 8.4 per cent of domestic invoices in November 2012 - well above the Asia average of 5.5 per cent. And the value of uncollectable (written off) business-to-business receivables was 7.5 per cent in India, compared to the Asia average of 5.3 per cent.
This would make any foreigner hesitate to do business with Indian promoters. "We have seen delays in the IT sector or amongst the small and medium enterprises," says Arun Rajan, country manager, Atradius.
This bad payment habit extends to bank loans. Even some young borrowers, such as students, default, in their first relationship with a bank. Today, gross NPAs in education loans are over seven per cent of advances. As that number is rising, banks are going slow on education loans. Former finance minister Pranab Mukherjee had even proposed a credit guarantee fund to compensate the banks, but it never materialised for lack of budgetary allocation. RBI Deputy Governor K.C. Chakrabarty highlighted the problem of student loan defaults during a lecture at the Noida-based JRE School of Management last year. "I suggest school alumni associations should become active in inculcating ethics and values among students," he said.
Sudip Bandyopadhyay, former CEO of Reliance Money, who now runs a firm called Destimoney Securities Pvt Ltd, says students are not mature borrowers. "Also, many times, the placement is not commensurate with the money spent on a course," he says.
Bankers say students sometimes leave the country without paying up. "We don't have a good tracking system - it is still evolving," says IDBI's Ravi. Some experts suggest that banks could reach out to such defaulters through their parents or by coordinating with immigration authorities.
Another area where borrowers often behave erratically is credit cards. Bankers have turned extremely cautious here: RBI data shows that the number of credit cards actually fell from 23.1 million in March 2007 to 17.7 million in March 2012. Card spend has, however, increased from Rs 41,400 crore to Rs 96,600 crore. "It is better to have a few good customers than many bad ones," says Bandyopadhyay of Destimoney. Bankers say nonsalaried people with an irregular income are more likely to default.
Foreign banks and their non-banking arms, too, have had bitter experiences in consumer finance after the economic downturn in 2008. Fullerton India, a non-banking finance company (NBFC) backed by Singapore-based Temasek Holdings, started with a nearly 90 per cent unsecured lending portfolio around five years ago. It suffered huge losses in the unsecured segment, with gross NPAs rising to over 10 per cent in the overall business. Since then, it has cut its exposure to half in the unsecured segment, especially personal loans.
The only disciplined borrowers, data suggests, are mortgaged borrowers. "We haven't seen people not paying up on a home or car loan in India," says Arun Thukral, CEO of the 12-year-old Credit Information Bureau (India) Ltd, or CIBIL. The bureau keeps records of all banks' borrowers, assigning each a credit score between 300 and 900, where 900 indicates the best repayment behaviour. The score helps a new lender assess the credit behaviour of an individual or company.
Thukral points out that Indians are not as leveraged as borrowers in the US or UK, but adds that credit tracking infrastructure is well developed in those countries, recovery mechanisms are more robust and borrowers are mature enough to admit to mistakes. "Post-2008, we all heard the stories of people leaving their cars on the road or abandoning their well furnished flats for bankers to repossess," says Bandyopadhyay. ARCIL's Rudran says he is not hopeful of such behaviour in India any time soon.
The lack of credit tracking infrastructure in India until recently has contributed to borrowers' lax attitude towards financial obligations. "There was always another bank ready to welcome you with open arms," says a banker who does not want to be named.
CIBIL is still struggling to rope in many institutions to get a better picture of credit behaviour. Four leading cooperative bank associations in Maharashtra joined CIBIL 10 long years after it was set up. "Politicians sell the loan waiver carrot, advising farmers not to repay banks," says an NBFC official who travels extensively in rural India. Banks are wary of lending to farmers as this segment has a history of default.
Sanjay Agarwal, group head for retail business at ARCIL, says there is a tendency in India to resort to litigation to scuttle the recovery process. For instance, he says, as soon as ARCIL buys an NPA from a bank, the borrower approaches the court, challenging the asset transfer.
"There are cases that are unresolved for more than eight years," says ARCIL's Rudran. "Asset recovery is a very tough business. You have to find out new methods to deal with rogue borrowers." He adds that defaulters often make all sorts of excuses and try to stymie the recovery process by approaching the courts.
"The borrower also uses indirect pressure from influential people," says a banker in the NPA department of a public sector bank who has received many calls from politicians. Deepak Gupta, Joint Managing Director, Kotak Bank - one of the few banks that specialise in buying NPAs from other banks - concurs, saying: "Most corporate default cases get resolved only through courts."
P. Rudran, MD & CEO, ARCIL, at the Bombay High Court, where many default cases are heard. He says: 'Some cases are unresolved for over 8 years. Asset recovery is a tough business. You have to find new ways to deal with rogue borrowers.' (Photo: Nishikant Gamre)
The courts are flooded with such cases. Take, for example, litigation between companies and banks over forex derivatives contracts. Many midsize exporters and importers who hedged their foreign currency risk suffered losses when the rupee-dollar rate moved beyond their comfort zone. Companies that had foreign currency exposure blamed the banks for mis-selling, and banks countered by saying the companies had failed to read the fine print. In November last year, the Supreme Court settled the wrangle by ruling that 'wilful default' covers not only normal banking transactions such as borrowing and lending, but also derivatives contracts. The borrowers lost, and bankers can now go after defaulters in derivatives contracts.
Another reason for bad behaviour by borrowers is the multiplicity of lenders. Apart from banks, there are NBFCs of varying shapes and sizes, microfinance institutions, district cooperative banks and regional rural banks and unregistered sources. At a recent seminar, Anand Sinha, another RBI Deputy Governor, cited the example of Andhra Pradesh, where microfinance institutions lent indiscriminately. "This would not have reached the proportions it did if there was information-sharing amongst MFIs," says Sinha.
CIBIL's Thukral says the bureau is gradually helping improve the credit culture, as more and more people are aware that a bad credit history can mean trouble. Banks put credit bureau reports at the top of their checklist. "If fresh loans won't go to bad borrowers, it naturally improves the culture," says Thukral.
With the role of credit reports becoming more important, some see a business opportunity. Two Mumbai-based entrepreneurs have set up Credit Sudhaar, a startup that offers advisory services to improve one's credit score. "Our clients are not only those who made a mistake in the past, but also those who want to maintain a good credit score," says co-founder Arun Ramamurthy, who formerly worked with Citibank.
CIBIL's Thukral says it is a reflection of growing awareness that hassled borrowers sometimes walk in or call CIBIL's helpline to discuss negatives in their report. "The cultural fabric of India is very different from the West," says Thukral. "Our parents and grandparents keep reminding us: jitni chadar ho utnay hi paon phelane chahiye (stretch your legs only as far as your blanket will go)."
Today, the CIBIL effect is not restricted to borrowing . A European bank in India, for example, requires job applicants in India to submit credit reports before it offers them a job. A professional who works for a private company and does not wish to be identified, said his friend was asked for a credit report when he approached Delhi Public School for admission for his daughter.
The possibilities for rogue borrowers to hide are shrinking. Taking the locks off a door or moving to another city won't work much longer. Time to check your credit score.
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