Hotel Chidambara back under hammer

Jun 6, 2012 - Times of India

NAGPUR: The Hotel Chidambara Internationalat Ramdaspeth (earlier Royal Palace), is once gain under the hammer. This was one of first properties of a bank defaulter that was auctioned in 2002 by evoking the stringent Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act that came into effect the same year.

As bad loans in banking sector had become a burning issue those days. Government enacted this law which empowered banks to go-ahead with seizure and sale of defaulters' assets. Those days every auction by a bank evoking this law including that of this hotel created a hype sending signals to wilful defaulters.

A decade later, Raipur-based businessman Balkrishna Agrawal who had purchased this hotel and rechristened it Chidambara International, is now a bank defaulter himself. He was known to be close to former chief minister of Chhattisgarh Ajit Jogi. They eventually fell apart with Agrawal joining Bahujan Samaj Party (BSP). Sources hint at political vendetta as a cause of his downfall.

In 2002, the original owner Rajkumar Khattar had mortgaged the hotel to Shikshak Sahakari Bank, which used the SARFAESI Act to recover its dues. The bank realized Rs 4.32 crore by selling the hotel that it claimed to be one its major achievements. Now when auctions under this law have become routine, Punjab National Bank (PNB), to which Agrawal owes over Rs 20 crore has invited bids for the property.

The bank has fixed a reserve price of Rs 12 crore—a three fold increase in a decade. This is not the first time PNB is trying to sell the property. The earlier three attempts to invite bids failed as no buyer turned up. Under the current auction, bids will be opened on June 27.

The hotel is located on a 8,000 square feet plot and has a built up area of 30,000 square feet. Realty players have mixed opinion about its value. Deepak Heda, a real estate advisor, said the locality has a market rate of Rs 15,000 a square foot and with the structure the hotel could easily fetch up to Rs 25 crore. Pankaj Roshan, a broker, said a reserve price of Rs 16 crore could have been set considering the market rates. However, the property may not be finding takers due to several hidden liabilities.

Agrawal was granted a loan by Kingsway branch of PNB for taking over a fertilizer factory at Raipur. However, the Chhattisgarh government cancelled the lease of the land where it was located. The business had to be shut down, leading to the default by 2007. The hotel is a part of the extended collateral security offered to the bank.

Agrawal, who is reportedly not responding to the bank's calls, could not be contacted. His brother Santosh Agrawal said they had purchased M/s Dharamdasji Morarji Chemicals and Fertilisers, a concern that ran on a land leased by Chhattisgarh government. "Although 50 years of the tenure remained, the lease was abruptly cancelled and the business came to a standstill," he said. The firm also has around 15 acres of freehold land near Raipur which could also be disposed of by the bank. However, most of it has been encroached upon and the government has failed to react despite FIRs, he claimed.

Tribunal sees sharp rise in debt recovery cases amid slowdown

Kian Ganz & Remya Nair - Livemint

Mumbai/New Delhi: The number of pending cases at India’s debt recovery tribunals (DRT) has increased by almost 70% in about a year, with the economic slowdown affecting the repaying capacity of borrowers and thus worsening the asset quality of banks.

Also, slow clearances of cases in the tribunals is adding to the pendency, say lawyers and analysts.

In response to a question in the Lok Sabha on 23 March, the finance ministry said 63,669 cases were pending in the tribunals as of 31 January. On 31 December 2010, 37,616 cases were pending, according to a Right to Information (RTI) request filed by Prashant Reddy, an intellectual property (IP) lawyer who also blogs on industry blog Spicy IP.

There are 33 DRTs in India, with three each in Chennai, Delhi, Kolkata and Mumbai—the last three having the maximum number of pending cases. The amount locked in as a result was Rs1.57 trillion as on 31 January, against Rs1.13 trillion as on 31 December 2010.

DRTs are semi-judicial authorities that help banks by speeding up the recovery process through steps such as issuance of attachment orders.

An official with the Indian Banks’ Association, who did not want to be identified, cited two reasons for the sharp increase in the number of pending cases at the debt tribunals.

“First is that more banks are approaching the DRTs to recover their bad debts,” this official said. “The second reason is that borrowers are also going to DRTs to challenge actions taken by banks under the Sarfaesi Act.”

The Sarfaesi Act, or Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, allows banks to auction properties of borrowers who fail to repay their loans, or recover their loans through securitization and asset reconstruction.

Of the 63,669 pending cases, 37,654 have been pending for more than a year. The finance ministry said a committee headed by a chairperson of the debt recovery appellate tribunal is examining the “legal, structural, administrative, monitoring and supervisory systems” of DRTs and will recommend measures to make these tribunals more effective and efficient.

“It is often challenging for DRTs to get all the interested parties together at one time. Hence, it becomes a long-drawn process. Banks facing large downside risks (dilution of market value of loan assets) try to settle NPAs (non-performing assets or bad loans) through one-time settlements or corporate debt restructuring,” said Robin Roy, associate director (financial services), at PricewaterhouseCoopers Pvt. Ltd. “Banks do a cost-benefit analysis before taking cases to DRTs as there could be substantial costs attached (long waiting periods) to going to DRTs.”

Banks have three legal options for resolving NPAs—the Sarfaesi Act, DRTs, and Lok Adalats, which are non formal alternative court, he said, adding that while loans above Rs10 lakh go to DRTs there is no sector-specific condition for approaching the tribunals.

Dushyant Kumar Mahant, a lawyer who has represented borrowers in the DRTs several times, said the case load has risen dramatically particularly because of the steep increase in property prices, which has resulted in many borrowers taking loans that they end up not being able to service.

The low disposal rate at the DRTs was caused by infrastructure problems, inadequate staffing also at senior levels, and non-cooperation by borrowers’ lawyers, said Navneet Gupta, Delhi-based partner at law firm SNG & Partners and who often represents banks.

Another lawyer who did not want to be identified blamed the bodies overseeing the DRTs and other tribunals. “The main problem is the appointments. It takes them 6 or 7 months to appoint the presiding officer and then the presiding officer has only a term of five years under the recovery of bad debt Act (Recovery of Debt due to Banks and Financial Institutions Act, 1993,) and they will start looking for a new guy after the old guy retires,” this lawyer said.

“It’s very lacklustre,” said one DRT lawyer about the presiding officers at many DRTs. “You go over there and even if (you) ask to present an argument over there, the matter is adjourned for one reason or another—(the officers) don’t have the bent of mind for disposal rate. It is very difficult for pendency to go down (this way).”

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 

Asset Reconstruction Companies - Missing the Good In Bad Loans

Business for ARCs picks up when bad loans mount with banks.  Not in India, where they remain hobbled by fear among banks and policy paralysis,
report Rishi Shah & Dheeraj Tiwari 

 

    The business of asset reconstruction companies, which specialise in settling bad loans of the financial sector, should pick up when an economy feels pain. Yet, even as the Indian economy decelerates to its slowest in three years and bad loans of banks hit an all-time high, ARCs remain in a state of drift, subdued by fear among banks and a loose policy framework. The pace of new bad loans with banks has always exceeded the loans transferred by them to ARCs for disposal. For example, between March 2009 and March 2010, even as bad loans with banks increased by Rs 15,774 crore, transfers to ARCs trailed at Rs 10,675 crore, according to data from the Reserve Bank of India (RBI). This differential is likely to increase as, between March 2010 and September 2011, bad loans of banks are up 40%. While exact numbers are not available, anecdotal evidence suggests flows to ARCs is not keeping pace. “There is no business coming our way,” says a senior official with a leading reconstruction company. According to the latest financial report of State Bank of India (SBI), India’s largest bank, it has Rs 40,000 crore of bad loans. Yet, in 2009-10 and 2010-11, it passed on just six bad loans with a combined book value of Rs 40 crore to ARCs. “In a continually rising NPA scenario, even large banks such as SBI and IDBI Bank sell three and two NPAs, respectively, in a year, that too year after year,” adds Rajiv Ranjan, president & CEO of Reliance ARC. “What can you guess about business coming the way of ARCs?” Business is not picking up for two reasons: fear among bank officials and a weak policy framework. 

FEAR OF ACTION

Bank officials are hesitant to sell bad loans. “Banking is dominated by the public sector, which is reluctant to pawn off assets to other management firms as they fear a loss of face,” says the head of a PSU bank, not wanting to be identified. When a loan is transferred, it goes off the bank’s books. But rather than see it as a way to clean the balance sheet, along with a possibility of recovering something from it, many bank officials fear this might be perceived as an admittance of failure to recover the loan. They also fear vigilance inquiries. “The problem in India is that everybody wants to complain,” says MS Verma, chairman of International Asset Reconstruction Company (IARC), an ARC promoted by HDFC Bank and Tata Capital. “Bankers are afraid that even in a fair process, questions might be asked as to why the NPAs had to be sold when recovery was possible.” Typically, every bank has a chief vigilance officer (CVO) looking into such complaints. Beyond the bank’s CVO, if required, even the Chief Vigilance Commissioner (CVC) and the Central Bureau of Investigation (CBI) can take up such inquiries. In fact, when an ED is to be promoted to CMD, CVC clearance is needed, and inquiries over transfers of bad loan to ARCs can lead to delays in appointments. Given all this, not doing anything is seen as a safer option. “In the public sector, usually, there is accountability only for doing, but none for not doing,” says a senior advocate who declined to be named as he represents banks in courts. “For existing bad loans, all he has to do is create a record that he tried to recover it in every possible way.” The numbers of Arcil, India’s largest ARC, bear that out. Arcil has acquired bad loans with a principal value of Rs 24,000 crore. Of this, Rs 9,000 crore came from ICICI Bank, a private bank, which is 50% more than what SBI gave. Both banks, along with PNB and IDBI Bank, are copromoters of Arcil.

WEAK POLICY FRAMEWORK

According to the RBI, as of June 2011, India had 13 operational ARCs, holding assets with a combined book value of about Rs 74,000 crore. But they are not endowed with capital. In developed markets, well-capitalised ARCs buy loans outright. In India, however, ARCs, pay a bank about 5% of the price of the loan agreed on. For the rest, ARCs issue security receipts (SRs), which is a promise to pay the bank a certain share of the sale value at the time of selling the bad loan. When bad loans have been transferred, both banks and ARCs have bickered over the pricediscovery mechanism and the auction process. Indian banks, typically, offer those loans to ARCs they have been unable to realise for five years or more, and so are often mired in legalities. Banks sell bad loans through an auction, for which they fix a base price. Neeta Mukerji of Arcil says the base price fixed by banks is random and has no relation to the asset’s residual value. “An ARC’s estimate of recovery expected, time frame, cost and funding cost is quite different from that of banks,” says Mukerji, officiating CEO of Arcil. Officials of four ARCs that ET spoke to say the process favours banks, with one even labelling the auction “a sham”. “They only want to sell the worthless, age-old NPAs, where they have almost exhausted recovery possibilities," says an official of one of those ARCs, not wanting to be named. "And they want us to pay a substantial price.” Verma of IARC says some banks conduct auctions only to find the “right price” for themselves to further use as a bargaining tool with defaulters. “Then, they go to the borrower and scare him by saying that ARCs will use tougher means and try to settle it for a higher price,” he adds. Another head of a smaller ARC, speaking on the condition of anonymity, says that during due diligence, one bank refuses to show any papers or even the asset to ARC officials, even though some might have legal claims on them. A government panel, with representation from industry, is currently looking at regulatory, legal and accounting issues plaguing ARCs in India. These include a standard format for documentation, ARCs going public to raise more capital and reduction in bottlenecks in the functioning of debt recovery tribunals (DRTs), which is the stage preceding ARCs. A quick resolution will benefit all stakeholders, says a finance ministry official who is part of the panel but did not want to be identified. “Experience suggests that NPAs, like a cube of ice, lose value over time. And rather fast,” he says.


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NPA, a multi-headed monster

February 9, 2012:  

Non-performing asset (NPA) is a multi-headed monster having multiple implications on the performance of banks. An immediate offshoot of rising NPAs is the higher provision required. Once an account is classified as NPA it goes through several phrases requiring progressively higher provisions.

A sub-standard Asset requires a provision of 15 per cent on secured portion and 25 per cent on the unsecured exposure. After 12 months as Sub-Standard Asset, it gets classified as Doubtful Asset 1(DA1) and requires a provision of 25 per cent on secured portion and 100 per cent on the unsecured portion.

Once the account crosses one year as DA1, it becomes Doubtful Asset 2 (DA2-1to 3 years) and requires a provision of 40 per cent on the Secured portion and 100 per cent on the unsecured portion.

Once it crosses three years, it becomes Doubtful Asset3 (DA3) and requires 100 per cent provision irrespective of the availability of security. Unsecured loans such as clean loans, educational loans attract 100 per cent provision even at DA1 stage.

Factoring Regulation Bill, a welcome reform

Factoring is a financial transaction whereby a business entity sells its receivables, i.e. invoices to a Factor at a discount. Although a receivable is a property right and is transferable, there was a long-felt need for a statutory framework for Factoring.

Passing of the Factoring Regulation Bill, 2011 by Parliament has almost gone unnoticed on account of other important Bills pending. The object of the Factoring law is to address the problem of delayed payments to micro and small business entities by large businesses for purchase of goods and services.

A special law, viz Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, was enacted in 1993, which was later incorporated into the Micro Small and Medium Enterprises Act, 2006. But in practice, these legislatiions did not improve the position of MSEs because of their dependence on large businesses for continued business. Salient features of the new Factoring Law need to be noted.

- Any company can commence Factoring by obtaining registration from the RBI as a non-banking finance company. Such registration shall be governed by the existing law applicable to NBFCs (Chapter IIIB of the RBI Act, 1934) as well as the new Factoring Regulation Act, 2011.

- Banks or corporations established under an Act of Parliament can also undertake factoring without being required to obtain registration from RBI. Thus, organisations like NHB, SIDBI, EXIM Bank can also undertake factoring.

- Definition of factoring also includes assignment of export receivables and thus includes 'forfaiting', subject to the requirements of the Foreign Exchange Management Act.

- Term receivables are widely defined to include toll or any other charges payable for use of infrastructure facilities. However, bank loans are excluded from the definition of receivables.

- The law applies to all business entities i.e. large, medium, small and micro entities, whether engaged in any manufacturing activity or trading or providing any services or in any other business activity. Applicability of the new law is, therefore, much wider and even large industrial houses and multinational corporations can avail factoring services;

- The definition of 'factoring' covers both, with recourse and without recourse factoring.

- The law requires that all transactions of assignment of receivables in favour of Factors shall be registered with the Central Registry established under the SARFAESI Act, 2002. The registry record shall be available for search by the public.

- Factors are declared to be credit institutions for the purposes of Credit Information Companies (Regulation) Act, 2005 and can have access to credit information relating to firms availing factoring services;

- Factors are not financial institutions for the purposes of SARFAESI Act and hence will not have rights of enforcement without the intervention of courts. But provisions of the Code of Civil Procedure, 1908 regarding summary suits are made applicable to claims of Factors to facilitate speedy recovery of receivables,

- The most important provision in the Act is insertion of section 8D in the Indian Stamp Act, 1899, granting exemption from stamp duty on documents executed for the purpose of assignment of receivables in favour of Factors notwithstanding anything to the contrary contained in any other law in force. In view of such exemption, assignment of receivables in favour of Factors becomes a viable proposition and is expected to give a boost to factoring.

Growth of factoring will solve the liquidity and working capital problems of numerous small and medium scale industries, which supply spare parts and operate as ancillary units of large manufacturing units and other business entities.

Traditionally, banks take lending decisions based on the borrower's capacity to pay and other securities. Factoring will be undertaken considering the capacity, standing and status of debtors. The new law is a major step in financial sector reforms, and needs to be appreciated.

(The author is Chief Advisor-Legal, IBA. The views expressed are personal)

Managing NPAs, maintaining NIMs, are immediate priorities: Sri B A Prabhakar,

Interview with CMD, Andhra Bank , Parnika Sokhi / Mumbai Feb 14, 2012, 00:39 IST

B A Prabhakar, who took over as chairman and managing director of Andhra Bank last month, has drawn up his to-do list. He shares his priorities in an interview withParnika Sokhi. Edited Excerpts:

Have you listed the areas needing immediate attention?
My immediate priorities are to concentrate on management of non-performing assets (NPAs) and net interest margins (NIMs). Slippages have gone up because of a few accounts but recoveries have been good. As a result, we have been able to show a net reduction in NPAs this quarter. We recovered about Rs 500 crore in the third quarter. We aim to show better results in the next quarter. Our NIM of 3.8 per cent is in line with our public sector peers. We aim to maintain this level. We want to also focus on branch expansion policy outside Andhra Pradesh.

You said the bank doesn’t aim to lend to micro finance institutions (MFIs) as   of now. Is it on fears that the exposure to the industry could turn bad? 
No, we have a negligible amount of bad loans from that sector, but we have restructured three accounts there. The reason for not going aggressive in that sector is that we would like to have more clarity on the regulation and legal structure there. We can look at expansion in a big way only after we have clarity on those issues. All the accounts restructured from the sector are from Andhra Pradesh. About half the total exposure of Rs 300 crore in MFIs is from that state. So, incremental lending will take place selectively, and preferable outside Andhra.

Which are the target sectors to increase exposure?
We would like to have an even growth in small and medium enterprises, and the retail category. We have not fixed any targets, as such, but these will be two focus areas that will enable us to meet our priority sector commitments. Loans to large corporate bodies form about 50 per cent of our portfolio and whatever credit growth we are targeting has to also come from that segment.

What are your plans to boost fee income?
That is one area we’ll have to work on. We are planning to take up third-party product distribution in a big way. That is where the focus on retail comes in. But we will also focus on increasing the retail liabilities and assets.

Your growth targets for advances and deposits?
We are planning to achieve credit growth of about 16 per cent and deposit growth of about 18 per cent by the end of this financial year.

We will wait for guidance on monetary aggregates from the Reserve Bank of India (RBI) before drawing up plans for the next financial year. That will give us some idea on the potential growth in the coming year.

Any thoughts on revising the interest rates on loans and deposits?
We’d like to wait for RBI’s next policy announcement.

Your hiring plans for the next financial year?
We are planning to hire about 1,450 clerks and 800 officers to take care of next year’s branch expansion and also to take care of the attrition in the bank. We plan to add at least 150 branches next year.

Banking on staff for recovery

Lenders are dedicating full-fledged teams to curtail the threat of rising defaults. Parnika Sokhi & Abhijit Lele / Mumbai Feb 15, 2012, 00:02 IST

Every day, between 7.30 pm and 11 pm, a top official of a public sector bank gets text messages from 46 zonal managers. The messages contain details on recovery figures of respective zones, with additional information on ranking of centres, based on recoveries.

The zonal managers have to send these numbers daily. Failure to do so will see an email from the chairman’s office seeking the details. The official says he has been doing this chore daily for the last one year. This helps keep a tab on the accounts which have slipped into the non-performing asset (NPA) category.

This is not a one-off incident. Banks reeling under asset quality pressure have beefed up recovery efforts. And, it has percolated to the ground level. Branch level staff are also being deployed for collection of dues.

“We have a recovery team of about 200 employees. Of this, a majority were redeployed from other departments in the third quarter,” said B A Prabhakar, chairman and managing director of Andhra Bank. The bank is targeting a recovery of at least Rs 500 crore this quarter through its in-house team.

The last two quarters of a financial year have always seen a flurry of activity for credit deployment. However, the situation is different this year. With the slackening of credit demand due to high interest rates, hectic activity is being seen on meeting recovery targets.

Lenders are also resorting to referring bad accounts backed with securities to Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) processes.

Nupur Mitra, chairperson and managing director at Dena Bank, said the bank was using SARFAESI and one-time settlements in a big way. “We are also holding massive lok adalats for small accounts,” said Mitra. The bank has deployed clerical staff and nodal officers to do the task.

In rural areas, some banks are asking customers, while extending fresh loans, to at least pay the minimum interest to avoid the loan slipping into the non-performing category.

Bankers say since asset quality pressure is more in the agriculture and small and medium enterprises (SME) segments, maximum recovery efforts are given in these two categories.

State Bank of India (SBI), the country’s largest lender, which had gross NPAs of Rs 40,000 crore at the end of December, has seen 19 per cent of its bad loans in the farm sector and 28.7 per cent in the SME sector. SBI’s cash recovery and upgradation in the December quarter was about Rs 2,000 crore, compared to Rs 1,430 crore in the year-ago period.

The thrust on recovery also comes at a time when not much activity is seen in the stressed asset sale market, after RBI issued guidelines in October 2007, stating banks while selling NPAs, have to work out the net present value of the estimated cash flow associated with the realisable value of the available securities net of the cost of realisation. The sale price, generally, should not be lower than the net present value.

“We were able to recover 100 per cent of principle in accounts, where the offer from asset reconstruction companies was at 30 per cent,” said Sounadra Kumar, deputy managing director, SBI. “Given this experience, the preference is for in-house effort than sale of bad loans,” she added.

0.25% cut in interest rates likely: SBI

By B Krishna Mohan Jan 11 2012 , Hyderabad

(SBI).

“With Inflation cooling down, I expect the interest rates to soften by about 25 bps. But we have to wait and see to know what is in store actually,” he said.

SBI has not seen any slippage in the net interest margin (NIM) and is expected to be in line with the guidance of 3.5 per cent, he said in Hyderabad on Wednesday.

The bank has restructured loans of several entities, but companies, particularly in the agri, automobile, ancillary and textile, are in the offing. The public sector bank will deal with each CDR (corporate debt restructuring) case on merit.

The effect of the debt restructuring will be partly visible in the third quarter result, which are to be announced in February. He also declined to comment on the non-performing assets (NPAs) during the quarter. “They (NPAs) are not as bad as we have expected,” he said without putting a number to it.

SBI had kept a watch on the NPA numbers by putting in an additional monitoring wing led by an official in the ranks of deputy general manager. It had also formed in-house recovery teams comprising officials and clerical staff to deal with the NPAs. Though the teams are not new, they are on the field with a special focus.

“SBI is making efforts to reduce the dependency on the outside agencies for recovery to the maximum extent possible. The in-house teams will track the accounts and alert the concerned clients for payments,” he said.

Kumar said SBI has been using the provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act that allows banks to take possession of securities and auction them for recovery.

On credit offtake, he said it is expected to grow between 16 to 18 per cent and deposits by 18 to 20 per cent in the fourth quarter of this financial year, he said adding that the focus will be on retail deposits and not bulk deposits. It has no plans to tinker the interest rates in the short term.

He said there is no stoppage of credit from SBI and it has already sanctioned many loans buy the corporate clients are waiting for a policy decision for the rates to come down.

On a query on the need for change in the provision norms, Kumar said SBI has not asked the RBI for any changes in percentage for the provisions.

On the savings account number portability, Kumar said that is a good concept, but its implementation will be fraught with some challenges that will require the banks to invest on the technology, tweak its core banking systems and make other changes.

During the year, SBI expects to recruit about 5,000 people at the official and clerical levels.

SBI, which successfully experimented with a ‘HNIs only’ branch in Hyderabad, on Wednesday has launched Vasundhara Senorita, an exclusive branch for women on the lines of the one existing at Lucknow.

Though aimed at women entrepreneurs, the branch will look to attract women customers across all strata. Men will allowed to carry out transaction in the branch but only as secondary account holders, as women will be the primary account holders.

All the banking paraphernalia apart, the branch has a play pen to keep the accompanying children busy, while the women make their banking transactions.

Sarfaesi laws may lessen banks' bad loan burden

Avinash Celestine, ET Bureau Dec 23, 2011, 03.22am IST
 
NEW DELHI: Banks will be allowed to take property seized from defaulting borrowers onto their own books, or in effect 'buy' the asset they sequester, thus reducing their non-performing loans, according to a revised securitisation law awaiting parliamentary sanction.

In effect, this would allow banks to clean up their books but at the risk of being saddled with an asset worth far less than what the bank paid for it.

This change, which forms a part of the proposed amendments to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Sarfaesi), introduced last week, comes at a time when banks face the risk of rising non-performing loans, and of being saddled with property seized from borrowers unable to pay back their loans.

Worse, a weak property market means that banks may be unable to find buyers for the property they have seized — at least at the price they want.

The same set of amendments also propose to give the finance ministry wide-ranging powers to notify certain types of banks to whom the provisions of Sarfaesi will not apply, or apply only with certain 'exceptions, modifications and adaptations'.

It also brings multi-state co-operative banks within the ambit of Sarfaesi and allows asset reconstruction companies (ARCs) to convert debt into equity as part of a restructuring. At present, Sarfaesi allows banks and ARCs to seize assets from loan defaulters, which in many cases include immoveable property. Banks then typically hold an auction to sell the property.

However, if a bank is unable to find buyers willing to bid above the reserve price, or the minimum bid amount, it currently has little option but to postpone the auction to a future date, and hope for a better bid.

Under the proposed changes, in case of a failed auction, the bank can depute one of its own officers to bid for the property at the reserve price at any future auction. If there are no other bidders yet again, or the bank's own bid is the highest, the property stands 'sold' to the bank. Under current law, a bank is not allowed to bid for property it puts up for auction.

"This is allowed under the Civil Procedure Code and the incometax recovery laws," said MR Umarji, chief advisor-legal, Indian Banks' Association. The changes also apply to ARCs.

Govt tables Amendment Bill to deal with recovery of bad loans

The government on Monday introduced an Amendment Bill in Parliament to enable banks and financial firms to effectively deal with the problem of bad loans.

The move could help bring down lending rates for home and corporate loans, experts said. Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2011, which was introduced by minister of state for finance Namo Narain Meena in the Lok Sabha, seeks to strengthen recovery process of secured loans.

It seeks to amend the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002 and Recovery of Debts due to Banks and Financial Institutions (RDBF) Act 1993.

The amendment in SARFAESI Act will "provide for conversion of any part of the debt into shares of a borrower company and such conversion shall be deemed always to have been valid as if the provisions of said conversion were in force at all material times."

Besides, it seeks to bring multi-State cooperative banks under the category of the bank.

At the same time, it will enable to increase the period of response to be sent by the banks or financial institutions to the representation of the borrowers to 15 days from 7 days.

It will also empower banks or financial institutions to accept the immovable property in full or partial satisfaction of the claims of the bank against the defaulting borrower.

The amendment will allow district magistrate or the chief metropolitan magistrate to authorise any subordinate officer to take possession of assets or forward assets to the secured creditors.

The Bill has also proposed to amend the RDBF Act 1993 that among other things would "enable the banks and financial institutions to enter into settlement or compromise with the borrowers and also to empower
Debts Recovery Tribunals to pass an order acknowledging such settlement or compromise."

It also seeks "to permit the multi State Cooperative banks, with respect to debts due before or after the commencement of the proposed legislation, to opt either to initiate proceedings under the the Multi-State Co-operative Societies Act 2002 or to initiate proceedings before the Debt Recovery Tribunal."

To ensure expeditious adjudication and recovery of dues of banks and financial institutions, remove legal anomalies and strengthen the Recovery Tribunal, the RDBF Act was amended in the years 1995, 2000 and 2004, the Bill said.

"Once the Bill is cleared, procedural changes in loan recovery is expected to lower the cost of funds for borrowers," Ernst & Young partner Ashvin Parekh said, adding that risk premium on secured loans will soften.

Banks may be allowed to accept immovable property to settle claims

The Hindu - Business Line  New Delhi, Dec 12: 

Banks and financial institutions may soon be allowed to accept immovable property in full or partial satisfaction of claims against defaulting borrowers. A proposal to this effect has been made in a new Bill introduced in Lok Sabha on Monday to amend the existing Sarfaesi law.

Currently, banks are not empowered to accept immovable property in full or partial satisfaction of the claim against the defaulting borrower, if no bidder comes to bid or banks are unable to find a buyer for such assets. Banks, as secured creditors, are, however, permitted to sell the securities to realise the defaulted loans.

This Bill — The Enforcement of Security Interest and Recovery of Debt Laws (Amendment) Bill 2011 — was introduced by Mr Namo Narain Meena, Minister of State for Finance.

It provides for mandatory registration of all securitisation, reconstruction and creation of security interest transactions in the Central registry. All such transactions that are subsisting on or before the establishment of the Central registry will also have to be registered, the Bill has said.

The Bill would also enable securitisation firms to convert any part of debt into shares of the borrowing company. At present, reconstruction or securitisation firms cannot convert their debt into equity in cases of business reconstruction, rehabilitation or revival.

Another significant proposal relates to allowing multi-state co-operative banks to initiate proceedings through debt recovery tribunals (DRTs). Also, banks or any person will soon be empowered to file a caveat so that before granting any stay, they are heard by the DRT.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (Sarfaesi) was enacted to regulate securitisation and reconstruction of financial assets and enforcement of security interest.

Finance ministry pushes banks to fast-track bad loan recovery

Sangita Mehta, ET Bureau Dec 12, 2011, 01.30am IST

MUMBAI: The finance ministry is pushing capital-strapped public sector banks to hasten recovery of bad loans to improve health, and has promised to fill vacancies at debt recovery tribunals (DRT) across the nation, partly responsible for inordinate delays in ending disputes.

"Needless to say that Rs2 lakh crore (of bad loans) are a drag on the capital of banks," a bureaucrat from the finance ministry wrote to bank chairmen recently.

Risks in lease rental discounting loans: Fitch Ratings

Fitch Ratings has come out with its special research report on 'risks in lease rental discounting (LRD) loans'. As per the rating agency the failure to appreciate the inherent risks of LRD loans may leave market participants exposed to stress in commercial rental market in an economic downturn.

Percieved as Less Risky: Lease rental discounting (LRD) loans are widely perceived by lenders to have lower risks than construction loans or direct lending to real estate corporates. The structure of a typical LRD loan ensures relatively higher availability of cash to service the loan and easier access to collateral in the event of default. Furthermore, anecdotal evidence suggests that the performance of such loans has been significantly better than other real estate loans (see Appendix 1: Survey of Institutional Lenders of LRD Loan).

Lenders Underestimate Risks: While LRD loans have a lower risk profile than other real estate loans, most such loans are unlikely to have medium to high investment-grade credit profile. As shown in Fitch Ratings survey (see Appendix 1) in some cases, the pricing of such loans is comparable to the loan pricing of high investment grade corporates. Strong linkage of a typical LRD loan to the corporate owner of the property and a relatively low cash cushion may limit the credit profile of such LRD loans.

Credit Linkage of LRD loans: Long-term lease contracts with high quality corporate tenants provide strong cash flows to service debt, while mechanisms such as rent deposits in an escrow account reduce commingling risk. However, linkage of the LRD cash flows with the credit of the borrower (who is often the owner of the building and is a real estate corporate) remains strong in a many LRD transactions. As such, if the borrower enters into bankruptcy proceedings or debt restructuring, the LRD cash flows would be affected by a time lag.

Low DSCRs: In many transactions, the implied debt service coverage ratio (DSCR) may be lower than the DSCR of similar structures rated investment grade. This is because the typical implied DSCR range of 1.1 to 1.3 seen in Indian LRD loans may not provide a sufficient cushion to debt payments during (even moderate) economic downturns. As such, over the last 10 years the Indian market has experienced downward rent revisions in the range of 10% to 40% (depending on location).

CMBS vis-vis LRD Loans: Significant similarities exist between Indian LRD transactions and CMBS transactions, particularly in the Asia-Pacific region. CMBS transactions with investment-grade ratings usually have a DSCR above that of a typical Indian LRD loan. As such, they are able to withstand much higher volatilities in rental cash flows. However, many CMBS transactions are exposed to refinancing risk at maturity, since the principal is usually not fully amortised.

LRD Loan StructureFitch has been presented with a wide variety of real estate financing structures. In addition to LRD loans, proposals include CMBS and construction-linked loans (also known as progress payments in other jurisdictions). To develop a complete view of the variety of LRD structures in the market, Fitch surveyed market participants.
The typical LRD structure consists of a real estate loan with a charge on a commercial property, along with an assignment of the future lease receivables. Thus the debt obligation is serviced by the rent/lease payments of tenants occupying the commercial property. These features ensure significant cash flow visibility for debt servicing, particularly if the tenants are financially stable corporates and are likely to remain in the property well beyond the initial lock-in period. Additionally, if the lender is a bank, the lender then draws comfort from its ability to enforce security (the underlying commercial property) under SARFAESI Act in the event of default.
Such features result in LRD loans having a relatively lower likelihood of default than a loan extended directly to a real estate corporate. The key structural features of an LRD loan are provided below.

Discounted Rent Value (DRV)The rent contractually received from the tenant (also known as gross rent) is adjusted for taxes, maintenance and other administrative costs to calculate the net rent. Where there are separate payment arrangements by means of a Common Area Maintenance (CAM) agreement between the tenant and the owner, less weight may be given to maintenance and administrative costs. However, while calculating net rent for LRD loans with a tenure greater than five years, not all lenders explicitly consider major maintenance expenses. As such, periodic capital expenditure will likely have a significant impact on cash flows. The net rent, thus calculated, is discounted by the interest rate of the loan over the life of the loan to determine the discounted rent value.

Volatility in Occupancy LevelsCorporate tenants in India typically stay the full term of their contract, owing to lock-in periods (usually three years), high upfront set-up costs (ranging from 18 months to 40 months of rent) and social costs (eg proximity to business partners/customers and employee convenience). To ensure occupancy levels are maintained over the tenure of an LRD loan (particularly loan tenures exceeding five years) it is important to evaluate the attractiveness of the business district and the supply of commercial real estate in the locality. An excess supply of commercial real estate at relatively lower rental rates is likely to result in a downward renegotiation of rents, or an increase in vacancy rates; either would affect the DSCR of an LRD loan.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment
Risks_LRD_Loans_Fitch_091211.pdf

Big borrowers of India Inc default on Rs 47,000 crore loans

Pradeep Thakur, TNN | Dec 6, 2011, 04.31AM IST

NEW DELHI: Large borrowers, who took loans of Rs 10 crore or more, have defaulted on payments to the tune of Rs 47,000 crore, with banks not even pursuing cases to recover over half the amount.

Data available with the finance ministry shows that least 700 defaulters who had borrowed Rs 10 crore or more from public sector banks and cumulatively owe over Rs 26,000 crore have gone scot free despite not clearing their dues. In another 3,400 cases where loans are of the order of Rs 1 crore or more, the lenders have moved courts and tribunals to recover Rs 21,400 crore.

But there are still concerns over the way banks are using options such as one-time settlement scheme to recover the dues. Investigations have shown that in several instances, it was not a simple case of default but even cheating was involved. Bank executives failed to attach personal assets of directors of companies that had defrauded the banks, sources said.

Query Corner: Banking & Finance

24 Nov, 2011, 06.14AM IST,   - Economic Times

Auto Debit

Can a bank auto debit money from your savings account towards dues of credit card without sending notice to customer?-SATNAM HUNDAL

Bankers have a right of lien and set-off. Set-off means the bank can adjust the credit balance in a customer's account against a debit balance in another account of the customer. The deposit and loan should be due and lawful (law of limitation does not apply). There is no need to send any notice. In fact, the banker must have sent notice when the account was in default.

Government should treat small units on a par with corporates

The Hindu

If the government wanted only efficient industrial units to survive, micro, small and medium enterprises (MSMEs) and large industries should be treated equally, Tamil Nadu Small and Tiny Industries Association (TANSTIA) vice-president KR. Gnanasambandan said here on Thursday.

When falling behind loan repayment schedules, small units incurred the wrath of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act and its stringent provisions. However, when large corporates get into debt problems, they were being given the option of converting debt into equity. Such a situation existed despite small industries being hailed as the engines of economic growth.

Mr. Gnanasambandan was addressing a ‘Stakeholder meet on MSMEs under India MSME Darshan 2011' organised by Madurai District Tiny and Small Scale Industries Association (MADITSSIA) and Institute of Small Enterprises and Development (ISED), Kochi, in association with Federal Bank and Export Credit Guarantee Corporation of India (ECGC). ‘India MSME Report 2011,' prepared by the ISED, was released at the meeting.

Tamil Nadu was home to the highest number of registered MSMEs, largest employment per unit and highest investment per unit. However, it was also the State with the highest number of sick units and its output 

lagged well behind the national average, he said.

Speaking earlier, S. Maruthappan, General Manager of District Industries Centre, said that the State government was planning to train educated youth in entrepreneurship to prevent their migration from villages to cities.

S. Mohan, Assistant General Manager, State Bank of India (SBI), Zonal Office, said that the bank was designating several branches as ‘MSME branches' to facilitate smooth credit flow.

P.M. Mathew, ISED Director, said that in the U.S., a government department prepared such reports on small industries while in the U.K., the Bank of England prepared it, and by the private sector in the European Union.

MADITSSIA president V. S. Manimaran said that MSMEs faced numerous hurdles, power crisis and high interest rates being the primary factors causing concern. R. Jayaraman, former Madurai Kamaraj University professor, said that MSMEs were facing a shortage of skilled workers. K.S. Serma Pandiyan, MADITSSIA secretary, spoke.

RBI to discuss Damodaran committee recommendations with IBA

November 17, 2011 04:47 PM

The apex bank will discuss the suggestions on pre-penalty on foreclosure of home loan, Internet and mobile banking with the IBA; Out of the 230 recommendation of the Damodaran Committee around 88 have already been accepted by the RBI

The Reserve Bank of India (RBI) has accepted 88 out of the 230 recommendations made by the Damodaran committee on customer services. While some of them are already in the public domain, the apex bank would be discussing the remaining suggestions with the Indian Banks’ Association (IBA) later this month.

Sources say that the 88 recommendations, where bankers had consensus, include recommendations such as banks should sell standalone financial products and not bundle it with any other product, have been accepted by the RBI. Some pending recommendations such as not imposing pre-penalty on foreclosure of home loan and suggestions made on mobile and internet banking, RBI will have a discussion with IBA by the end of this month.

SBI to auction assets of 21 defaulters in Patna

Kumod Verma, TNN Nov 17, 2011, 05.19PM IST

PATNA: In a major policy decision, the Stressed Assets and Resolution branch (SARB) of the State Bank of India, Patna, has decided to auction the mortgaged properties of 21 borrowers valued at Rs 4.21 crore at the branch premises on November 21.

These borrowers, who had taken loan from SBI, not only failed to repay the money but also did not turn up for negotiations with the bank, said additional general manager (AGM), SARB branch, Sunil Sharan Sinha.


He said there were altogether 21 borrowers who were declared defaulters long time ago under the bank rules. Their properties, which include plots, houses, shops and other assets, would be put on an open auction on November 21.

Sinha maintained that the bank has still kept its door open for defaulters till November 19 afternoon to reach a settlement with the bank in their own interest; otherwise, the bank would go ahead with the open auction plan under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.

Two of the borrowers, New Cozy Sweets and Golu Kiranaz, both located in Danapur, reached a settlement with the bank on November 16, he added.

According to sources, the SBI has kept the reserved price of the total properties to be auctioned at Rs 4.21 crore. They would thus be put on auction at not less than Rs 4.21 crore. A piece of land located in the prime area of Gardanibagh and a sprawling house in S K Puri have also been targeted for open auction, sources said.

The SBI AGM said this would be the first time that Patna SARB will auction mortgaged property in the state capital to realize the bank's dues from defaulters. He said that bank officials right from chief manager to general manager would be present at the open auction.

"The SBI usually restrains itself from taking such harsh steps. But faced with the apathetic attitude of borrowers towards repayment of their loans, the bank has been forced to take such a step," he said.

Weavers in a fix over loan waiver

 November 15, 2011 - By DC Correspondent - Anantapur 

A stalemate continues over the recovery of Rs 17 crore loans from handloom weavers in the district as the government proposed to waive these.

A stalemate continues over the recovery of Rs 17 crore loans from handloom weavers in the district as the government proposed to waive these.

State government proposed to waive Rs 16.9 crore loans availed by 9,104 crore handloom weavers in the district and the file has been sent to the ministry of finance.

While the weavers are refusing to pay the loans, bankers are insisting that they do so. Weavers who are already reeling under a financial crunch, are not in a position to repay the instalments.

A widow, Poojari Govindamma of Hindupur whose husband Krishnam-urthy committed suicide unable to pay debts one-and-a-half year ago, lamented that her husband borrowed Rs 1.3 lakh loan from a bank and repaid Rs 83,000 before he died, but she received notices from the bank about confiscation of property as per the Sarfaesi Act (The Securitisation and Reconstruction of Financi-al Assets and Enforcement of Security Interest Act, 2002). The Sarfaesi Act allows banks and financial institutions to auction properties (residential and commercial) when borrowers fail to repay their loans. It enab-les banks to reduce their non-performing assets (NPAs) by adopting measures for recovery or reconstruction.

Thousands of weavers have received notices from banks, demanding repayment of loans, though government agreed to waive these.

Bankers said that recovery percentage was poor and notices would be served to the defaulters until the government issued loan waiver orders.

Meanwhile, the order to waive 3,400 handloom weavers’ loans to the tune of Rs 8.9 crore is not being implemented on expected lines as bankers are delaying no due certificates to the beneficiaries.

As a result, cash is not credited into the bank accounts of beneficiaries. In fact, state government promised to waive weavers’ loans of Rs 348 crore of which Rs 109 crore were released across the state. It assured Rs 239 crore loan waiver in the next phase. Weavers are in a dilemma with bankers refusing to credit the cash in their bank accounts.