The problem with bad loans

The health of the banking sector is deteriorating. India needs robust insolvency laws

Sunil B.S.   First Published: Thu, Aug 23 2012. 07 30 PM IST

pdated: Thu, Aug 23 2012. 07 36 PM IST

The sharp economic downturn has once again brought the problem of bad loans to the forefront.

In its annual report released on Thursday, the Reserve Bank of India (RBI) pointed out that the health of the banking system is linked to the credit cycle. “Financial institutions tend to overstretch their lending portfolio during economic booms and tend to retrench the same during economic downturns,” it said.

The market is often abuzz with speculation about the inability of some overleveraged business groups to service their bank loans. India has traditionally had a system that tries to help companies in financial distress, making it easy for them to restructure loans. Even RBI has pointed out that the ability of Indian banks to maintain asset quality is “partly on account of the policy of loans restructuring”.

While bad assets of Indian banks have grown 46% in the fiscal year ended March 2012, the growth pace of credit has been at 17%. On 31 March, gross non-performing assets (NPAs) of the banking system amounted to Rs.1.37 trillion and restructured assets Rs.218 trillion.

To reduce the adverse effects of economic downturns on companies and lenders, corporate debt restructuring (CDR) was introduced by RBI in 2001. Despite success in helping companies emerge out of financial troubles, there are several shortcomings in this mechanism. India continues to miss strong insolvency laws.

Restructuring often involves extension of maturities, lower interest rates, debt forgiveness, among others, in case a firm is unable to repay its debt. Further, loans may or may not get classified as NPAs after they are restructured. A working group set up by RBI to review existing guidelines on loan restructuring has recommended increasing the provisions for accounts which get the asset classification benefit on restructuring. Hence, such restructuring places huge stress on the resources of banks

Such restructuring has also attracted criticism about being partial towards big companies. RBI deputy governor K.C. Chakravarty, in a recent speech, raised an important question: Are small and marginal borrowers discriminated against by the banks? An economic downturn is likely to affect smaller companies more adversely than larger ones, so smaller borrowers should be having a greater share in restructured accounts. The data with RBI does not show this.

The soft corner which Indian banks have for large companies is also highlighted by a recent report by Credit Suisse Group AG, which pointed out that the exposure to 10 large industrial groups constitutes 13% of the entire Indian banking system’s loan assets.

In the absence of effective laws on insolvency, many firms who can’t repay their debts for reasons beyond their control remain orphans, and banks are forced to restructure their loss-making assets at a cost. The Sick Industrial Companies Act (SICA), 1985, enabled sick firms to approach the Board for Industrial and Financial Reconstruction (BIFR) to help them revive.

Under the SICA provisions, a company is classified as sick if it has a track record of erosion of net worth over five years. But what is required is a law, which can detect that a company is going through financial difficulty in earlier, and then attempt to revive it. The lack of infrastructure has resulted in bankruptcy procedures under BIFR to take a long time, something which needs to be addressed. Also, steps should be taken to prevent misuse of BIFR provisions by companies that, under section 22 of SICA, seek immunity from creditors after cooking their accounts; this has plagued efficiency at BIFR for long.

Also asset reconstruction companies (ARCs), which were established by the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, to acquire, manage and recover illiquid loans or NPAs from banks have failed to take off in a big way. The appetite of Indian investors for securities issued by ARCs is weak, and remains limited to short-tenor papers and those with high ratings. A major hindrance in the way of development of securitization in the country has been high stamp duties. Moreover, the Indian credit markets are closely regulated and loans typically don’t trade on a secondary market, unlike developed countries.

These laws are also tilted in favour of creditors whose major goal remains short term, which is to recover their debts. What is needed are sound insolvency laws in our country along the lines of chapter 11 in the US, which can protect firms and help them adopt a suitable strategy to emerge out of financial difficulties.

http://www.livemint.com/Opinion/FF0FFDxOooUbUDEcAWDHmI/The-problem-with-bad-loans.html

http://foreclosureindia.com/

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

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

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

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.