Bank-auctioned homes may be cheaper

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

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

http://www.business-standard.com/article/finance/banks-start-crackdown-on-wilful-defaulters-113032500424_1.html

Credit Unworthy

Ill-behaved Indian borrowers will now find it tough to hide from authorities

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.

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.

A reconstruction boom?

For the first time, that there exists a legislative framework that allows ARCs to focus on revival and reconstruction.
Haseeb A. Drabu .

By allowing asset reconstruction companies (ARCs) to convert a company’s debt into equity, the framework of management of non-performing assets is likely to undergo a fundamental change.

Amendments to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) that allow these changes can potentially alter the landscape of asset reconstruction.

Till now, banks and lenders in general had access and recourse only to the assets of the borrowers. The debt of a company was directly linked to the physical assets created by it. Equity was kept out of these arrangements unless it was specifically earmarked or borrowed against. It was not available for recovery of overdue debts.

With the new amendment passed by both Houses of Parliament, debt and equity have been made fungible as far as recovery from defaulting companies is concerned. ARCs have been given complete and unbridled access to the equity of a defaulting company. With no restrictions on it, either in terms of size or type, this amounts to powers of changing the ownership and, with that, the management and leveraging not just of financial equity but also the business, brand and other types of equity of a company. This has enormous implications not only for lenders and borrowers but the entire financial architecture of the economy.

The biggest problem for ARCs was their ability to extract value from assets. Apart from all the litigation, procedural problems and unreal pricing of impaired assets by banks, ARCs often face a situation where the value of the asset is lower than that of the debt of the defaulting company. In such a case, the enterprise value of a company is less than its asset value. As such, ARCs can’t make much from the assets that they buy.

Despite a situation where the rate of growth of non-performing assets (NPAs) has been higher than the rate of growth of credit and the consequent high levels of NPAs, ARCs have been asset-starved for the past two years. No wonder then that despite permitting the formation of securitization companies and asset reconstruction companies in 2003, the market for impaired assets in India is far from developed.

Even though a number of ARCs have been set up that have been purchasing NPAs from banks, they haven’t been able to develop a robust stressed asset market or an active distress and restructured debt paper market in India. At best, ARCs have functioned as asset-recovery centres that are primarily into asset stripping rather than asset reconstruction and business revival.

This amendment which gives them recourse to equity has the potential to trigger the development of a healthy market for non-performing and impaired assets. The move seems to have been timed well. It comes at a point when the gross non-performing assets of the banking system are at a decadal high and are likely to be around 4% of the gross advances at the end of this fiscal. If one adds restructured assets, one-time exemptions and evergreen ones, the level is almost twice as much. Seen from a stressed asset market perspective, it is a business worth Rs 5 trillion.

If private equity participants—globally there are specialist distressed asset private equity firms—can team up with local ARCs, this can be a great business opportunity. Not only that, it will also be a systemic gain as their ability to turn around companies will be much higher as India seems to be nearing the end of the downturn. This is an ideal time for investments in distressed assets. From next year, interest rates will start declining and as and when growth picks up, the pricing of these assets will improve faster than their prospects of revival.

At the transactional level, the ability to convert debt into equity will be especially useful as it will reduce interest costs for companies. This is a frequent reason for firms getting into default. In addition to this, reconstruction and revival becomes easier with innovative and quick structuring of the debt component.

These possibilities, including those of changing owners, promoters or managements, will enable ARCs to offer better packages to banks for bad loans.

Now, for the first time there exists a legislative framework that allows ARCs to focus on revival and reconstruction. The efforts will be, or rather should now be, on buying an impaired asset based on business viability, using specialized skills and tools to turn it around and then reselling the stake the moment the company recovers. Apart from making profits for themselves, ARCs will have contributed to the national economy by preventing capital waste.

Haseeb A. Drabu is an economist, and writes on monetary and macroeconomic matters from the perspective of policy and practice. Comments are welcome at haseeb@livemint.com. To read Haseeb A. Drabu’s earlier columns,go towww.livemint.com/methodandmanner-

http://www.livemint.com/Opinion/bsS1xllKPFzCj95WqqoSxN/A-reconstruction-boom.html

Asset reconstruction firms expect boost in business

According to a Bill passed on Monday, these firms can convert part of their debt into shares of defaulting companies.
Dinesh Unnikrishnan 

Updated: Wed, Dec 12 2012. 12 42 AM IST

Mumbai: Asset reconstruction companies (ARCs) that purchase bad loans given to sick units from commercial banks are likely to see a revival in their business, once the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill 2011 comes into effect.

The Bill, passed by the Lok Sabha on Monday, allows ARCs to convert part of the debt into the shares of the defaulting companies and purchase the sticky assets of multi-state cooperative banks, among other things.

The actual implementation of the new rules may not take place immediately as the Bill is yet to be cleared by the Rajya Sabha, the upper house of Parliament, following which the Reserve Bank of India (RBI) will announce detailed guidelines.

Chiefs of leading asset reconstruction companies are optimistic that the provision to convert debt in distressed companies to equity will make such purchases more attractive as equity ownership will give more control to them in the operations of companies besides yielding higher returns once the companies turn profitable.

For companies too, conversion of debt into equity will be beneficial as their interest payment burden will come down.

“It’s indeed a big positive for ARCs,” said P. Rudran, managing director and chief executive officer of Arcil, India’s largest ARC. “This will enable us to do actual reconstruction of businesses for the eligible firms. ARCs will be able to take equity ownership in such companies and exit at a later stage by earning an upside on the equity, when the unit turns profitable.”

Another key provision of the debt recovery Bill allows banks to accept immovable property of defaulting companies to realize claims.

ARCs are currently not allowed to directly pick up stakes in stressed units whose loans they buy from commercial banks or other financial institutions. Instead, they typically facilitate the bringing in of long-term capital to these firms.

According to Rudran of Arcil, the provision to allow banks and financial institutions to file caveats and to be heard in debt recovery tribunals before any stay is granted will ensure that the process of law is not misused by unscrupulous borrowers to delay settlements and payment of dues.

“When you are reviving a running company, you are investing in a sick unit. ARCs always wanted to have equity relationships in companies which have a potential to revive but it was not allowed,” said P.H. Ravikumar, managing director and chief executive officer of Invent Assets Securitisation and Reconstruction Pvt. Ltd. “The new provisions will help ARCs to focus more on reviving the units rather than just buying out the bad assets.”

Ravikumar is optimistic that the provisions in the new law will help Indian ARCs buy more assets and enhance their ability to revive sick units in a slowing economy. Birendra Kumar, chief executive officer of International Asset Reconstruction Co. Pvt. Ltd, said more clarity will come only after the Reserve Bank announces the norms.

Slowing global exports, high inflation and high interest rates have hit the earnings of most industrial units, especially small and medium enterprises, in Asia’s third largest economy. This has impacted the ability of many companies to repay loans to commercial banks.

However, despite the rise in non-performing assets (NPAs), the business of ARCs is not swelling. Even Arcil, the largest among the ARCs, added just Rs.200 crore to its books this fiscal. For the other two ARCs, there have been hardly any deals in the current fiscal. Arcil has assets under management worth Rs.6,200 crore, Invent has bought assets worth Rs.2,500 crore, while International has principal outstanding assets of Rs.4,000-Rs.4,500 crore. Analysts said the business prospects of ARCs look bright in India, given the stress in the economy and the rise of bad loans and restructured assets. Gross NPAs of 40 listed banks rose by 47% to Rs.1.6 trillion in September from Rs.1.1 trillion in the year-ago period, with state-run banks leading the pack.

Analysts expect at least 25-30% of the restructured assets to turn bad in the absence of a major pick up in the economy, which grew at 5.3% in September quarter. Total restructured assets under the so-called corporate debt restructuring mechanism touched Rs.1.9 trillion on a cumulative basis till September. “It is boom time for ARCs, given the rise in bad loans in the banking system,” said Abhishek Kothari, research analyst at Violet Arch Securities Ltd.

“Post the new regulations, there is a likelihood of more bad loans being sold to ARCs as they will be keen to take equity relationships, which will reward them at a later stage, when valuations go up.”

http://www.livemint.com/Politics/xtLcRxhvhTqpwySmiABmYM/Asset-reconstruction-firms-expect-boost-in-business.html

Bank auction buyers cannot file writ petitions seeking refund: HC

MOHAMED IMRANULLAH S.

Dismisses case seeking refund of Rs. 4.25 lakh from Canara Bank

Purchasers of immovable properties in auctions conducted by nationalised banks cannot file writ petitions seeking refund of their money, on account of certain encumbrances in the properties, as such transactions are purely commercial in nature, the Madras High Court Bench here has held.

Justice K. Chandru passed the ruling while dismissing a writ petition filed by an individual seeking a direction to the Chief Manager of Canara Bank, Melur Branch, Tuticorin, to refund Rs. 4.25 lakh with interest from November 8, 2011, as the property he purchased could not be registered in his name.

According to the petitioner, E. Muthuraj of Tuticorin, he purchased 10.107 cents of land at Sankaraperi village through an auction conducted by the bank. He paid the entire sale consideration to the bank and also obtained a sale certificate issued in his favour.

Subsequently, when he attempted to register the property in his name, the Sub-Registrar concerned informed the writ petitioner that the property actually belonged to the government and no sale deed could be registered with respect to it in favour of a third party.

An application made by him under the Right to Information Act, 2005, to the District Registrar Office revealed that the land was part of Boodhan Movement, initiated by Acharya Vinoba Bhave in 1950s for the benefit of landless poor, and it stood in the name of the State government’s Boodhan Board.

However, in a counter affidavit filed by the bank through its counsel C. Jawahar Ravindran, it was stated that the property was taken charge of under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act from one of its loan defaulters.

When the property documents were submitted as security by the borrower, the bank’s panel of legal experts had opined that the mortgagor had a valid title over it. Stating that the bank was unaware of the encumbrance, it rejected any kind of liability to repay the amount to the auction purchaser.

Further, the bank relied upon Rule 15 (3) of the Tamil Nadu Boodhan Yagna Rules, 1959, which permits mortgaging of property belonging to Boodhan Board. It also pointed out that the sale certificate issued in favour of the purchaser was exempted from being registered under the Registration Act.

After recording the contentions put forth by the petitioner as well as the bank, Mr. Justice Chandru recalled that in a judgement passed on September 12, a Division Bench of the High Court had held that it was the purchasers who must be diligent enough in enquiring about the encumbrances before purchasing properties through bank auctions.

Pointing out that statutory rules provide for sale of a property only after 30 days of a public notice issued by banks, the Division Bench said that the time was intended to serve two purposes:

One for the bank’s loan defaulter to gather resources and repay the money if possible and another for all intending purchasers to make sufficient enquiries as a person of normal diligence and ordinary prudence would do while buying an immovable property.

http://www.thehindu.com/news/cities/Madurai/bank-auction-buyers-cannot-file-writ-petitions-seeking-refund-hc/article4105979.ece

Take over of Management of An Engineering Institute.

Yerneni Bhargav, Managing Partner, Foreclosureindia.com


Hyderabad :  SARFEASI Act ,section 13 (4) (b) specifies that " Take over the management of the business of the Borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset: One of the Public sector Bank has issued a Lease /Sale Notice for Take over of the Management of an Engineering Institute. The notice is published below for information.

      All the Borrowers of the Banks and Financial Institutions shall be vigilant about their loans to safe guard their management control of their businesses.

PSU banks trying to join hands for extending loans to big projects

Dheeraj Tiwari, ET Bureau May 23, 2012, 03.11AM IST

NEW DELHI: Grappling with a rising tide of bad loans, state-run banks are trying to cobble together a joint front to evaluate and extend loans to large projects.

The proposed system, being developed in consultation with the finance ministry, will require banks to form a consortium to appraise commercial projects seeking to borrow large funds but does not fix a limit as of now.

"The idea is to set up a uniform system of appraisal for all 26 state-run banks to rein in bad loans and ensure prudent lending," a finance ministry official said. "The system will ensure that an individual bank does not have excessive exposure to one borrower."

The finance ministry has asked smaller banks to give loans above Rs 150 crore only through a consortium.

Non-performing assets, or bad loans, of nationalised banks rose to 2.9% of their total lending in December 2011 from 2.3% in March. Gross non-performing assets of these banks stood at Rs 59,397 crore at the end of December, finance minister Pranab Mukherjee told the Parliament on Tuesday.

According to ratings agency Crisil, bad loans of state-run banks will rise to 3.2% of their total lending, or Rs 2 lakh crore, by March 2013.

The new system will ensure that banks share data of all existing loans to corporates and large borrowers. This will help them take an informed decision, the finance ministry official quoted above said.

Banks already follow a prudent exposure limit, but the government wants to add another layer of protection to avoid a repeat of Kingfisher Airlines-like situation. Public sector banks have together lent Rs 5,608 crore to the troubled airline. Of this, the exposure of State Bank of India alone is Rs 1,580 crore.

Much of this loan is at the risk of becoming a bad debt.

Banks, however, say they are not sure how the new system will work out. "Common appraisal system will automatically mean that most of the lending will be done through the consortium route," chairman of a PSB said. "But we will have to see the outcome of the final policy before stopping individual lending."

To ensure that the common appraisal system does not delay loan sanctions, the finance ministry has asked banks to set up zonal panels. "We have asked banks that this committee should meet at least once a week for quicker processing of loan applications," the finance ministry official said.

http://articles.economictimes.indiatimes.com/2012-05-23/news/31827568_1_bad-loans-public-sector-banks-state-run-banks

Attention . Attention, Attention please.......

SBI SCHEME FOR ONE TIME SETTLEMENT OF NPA's OF MSME SECTOR.

( SBI OTS-MSME , 2012)

Attention . Attention, Attention please.......

Dear Borrower / Co Borrowers.

ARCIL intends to return the surplus amount available on borrowers loan account. All are requested to please spare two minutes and go through the names of the borrowers / Co borrowers and if you know any of them, please  inform them  to go to the address given in the advertisement and claim their surplus immediately.

Published in THE FREE PRESS JOURNAL, Mumbai, Wednesday, March 14, 2012, PAGE 13

Govt may allow higher foreign play in bad asset business

An FII may be allowed to pick up 49% in a bad asset bought by an ARC from a bank from 10% earlier.

Aveek Datta.

Mumbai: The government may raise the level of foreign direct investment, or FDI, in asset reconstruction companies (ARCs) and allow foreign institutional investors, or FIIs, higher investment limits in security receipts (SRs) which such companies typically issue against a pool of bad assets.Both proposals are critical to boost the asset reconstruction business in India at a time when bad loans in the banking system have been on the rise in a slowing economy.

A long-standing demand of the sector, the changes could be part of the government’s budget for 2012 to be presented in Parliament by finance minister Pranab Mukherjee on 16 March.
The finance ministry is considering a proposal to hike the maximum permissible stake a single FII can pick up in a bad asset bought by an ARC from a bank to 49% from 10% earlier, according to two people familiar with the matter. The maximum collective stake that multiple foreign entities can hold in such an asset may also be increased to 74% from 49% earlier, they added. None of them wanted to be identified.
FDI in ARCs can also go up from 49% to 74%. Even though there is no sub-limit within the 49% permissible limit, typically the Reserve Bank of India (RBI) does not allow one single entity to hold more than 10% stake in an ARC currently.
Barring Asset Reconstruction Co. (India) Ltd (Arcil), India’s oldest and largest ARC, none of the other 12 companies in the sector has been able to acquire substantial bad assets from banks due to paucity of funds.
“An advisory group comprising executives of asset reconstruction companies had made a recommendation to the government (for raising the limit of foreign investment),” said Birendra Kumar, managing director and chief executive of International Asset Reconstruction Co. Pvt. Ltd. “It will be a positive development if the government were to allow this.”
RBI and the finance ministry have been discussing both the proposals.
Typically, ARCs set up separate trusts to acquire individual assets. These trusts issue SRs against the bad assets bought. The SRs are bought by banks themselves as qualified institutional buyers, or QIBs, as well as other investors. Banks do ask for upfront payment in cash, too, instead of SRs.
There are several regulatory restrictions put by RBI on the source of funding that ARCs can tap. Out of the available sources, banks, notified financial institutions and non-banking financial companies do not lend much to ARCs. Another source of liquidity for ARCs could have been domestic funds, but there are a very few in India focused on distressed assets.
P.H. Ravikumar, managing director and chief executive of Invent Assets Securitisation and Reconstruction Pvt. Ltd, said that if there were more funds from foreign investors at the disposal of ARCs they would be able to bid for more assets.
“Over the last two years, all the ARCs put together haven’t managed to acquire assets worth more than Rs. 1,000-2,000 crore,” Ravikumar said. “If the limit of foreign investment is increased to these limits, we can buy assets to the tune of Rs. 5,000-7,000 crore.”
Since these foreign investors are minority shareholders at present, they don’t take an active part in the revival of assets. The situation may reverse if they were allowed a sizable stake, Ravikumar added.
ARCs will play a crucial role in reducing the burden of bad loans on banks, at a juncture where non-performing assets (NPA) in the banking system have grown rapidly.
A 6 February Mint analysis of 34 listed banks that had announced their December quarter results showed that their gross NPAs had grown to Rs.76,644 crore, a 30.51% year-on-year increase. The analysis didn’t include NPAs of State Bank of India (SBI) since India’s largest bank was yet to announce its December quarter earnings as on that date. SBI said on 13 February that its NPAs at the end of December touched Rs. 40,098.43 crore, or 4.61% of its total advances, the highest proportion since September 2005.
Many corporate and retail borrowers have been unable to repay debt as economic growth slowed to under 7% this fiscal from 8.4% in the previous one. After declining continuously between fiscal years 1995-96 to 2007-08, the total stock of bad loans has seen a sharp rise, RBI deputy governor Anand Sinha said in February.
“From 15% in 1995, NPAs came down till 2008, but they have risen sharply by 91%, or Rs. 46,670 crore, between 2005-06 and 2010-11,” Sinha said atMint’s annual banking conclave in Mumbai.
Another policy intervention that ARCs have been hoping for to incentivize the effort and resources required to buy and revive a distressed asset is to allow them to covert a portion of the debt attached to it into equity.
At present, there are regulatory restrictions on ARCs picking up a stake and they make money by earning a fee in lieu of managing the trust through which the asset is acquired and the debt, recovered.
Kumar of International Asset Securitisation said that an amendment to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, to allow conversion of debt to equity had been moved in the winter session of Parliament in 2011 and is pending before a standing committee.
The SARFAESI Act provides the framework in which ARCs operate.
aveek.d@livemint.com


http://www.livemint.com/2012/03/13125635/Govt-may-allow-higher-foreign.html