Thursday, April 28, 2016

The Story of Dwindling Loan Recovery Cases

The story of dwindling loan recovery cases

There’s no point releasing the names of defaulters if the courts don’t follow up with quick and appropriate action

Have the courts helped banks accelerate the recovery of bad loans? That banks could not create enough confidence in their classification of ‘wilful defaulter’ is correct.
Recent representations to the ministry of MSMEs and the Reserve Bank of India, and agitations by the federations of SMEs prove the point.
If, on the basis of such classification, the list of wilful defaulters is made public, it would certainly damage not just the prestige of the person or institution involved but also permanently close the doors for further economic activity by such entities.
Secondly, the Bankers’ Book of Evidence Act clearly spells out the information that could be disclosed by banks. Thirdly, as RBI Governor Raghuram Rajan has repeatedly said, it hurts the financial system of the country.
A look at the BSR data (see table) shows the speed with which courts have responded to closing the bad debt cases referred to them. The loans recovered through judicial processes are dwindling year after year — it’s just less than 20 per cent of the amount involved.
The number of cases referred to courts increased tenfold between 2012 and 2015. The number of cases settled through any of the three available legal options of recovery of bad loans to banks has been on the decline. The amount involved in legal process of recovery is nowhere near the amount of NPAs declared for the year.
Lok Adalats look like small causes courts where lakhs of cases involve small amounts and the percentage of cases settled was less than 5 per cent in 2014-15. If we look at the DRTs, a highly expensive and time-consuming process, only 14 per cent of the amount involved is settled.
The much touted recovery mechanism through the Sarfaesi Act has not even touched 25 per cent during 2014-15. Its decline year after year is more alarming. Most cases referred under this Act are collateralised MSME loans and not big corporate advances.
Many questions
Some public sector banks have separated the recovery function from credit origination and monitoring. The officials in such outfits whose job is only to recover the bad loans, have already developed a negative mindset and would be averse to lending for development activities.
The questions that arise are: 1. Are the processes wrong? 2. Are the powers not being exercised properly in accordance with the law? 3. Are the properties overvalued at the time of loan origination? 4. Do all these cumulatively contribute to the failure under this Act?
A thorough study is required to go into these issues to fix them properly and make the necessary amendments to the laws and rules in the public interest. Banking reforms must address these core areas.
It is highly desirable that the Supreme Court does all that is required to accelerate the legal recovery process as evidence in most cases is writ large in banks’ accounting books.
DRTs are supposed to resolve the cases within six months. But hardly any instances of this are evident. No purpose would be served by just making the defaulters’ names public unless there are quick exemplary legal punishments meted out to the errant.
(This article was published on April 26, 2016)

Thursday, April 7, 2016

RBI treats obesity and anorexia with the same medicine
RBI’s move to restructure MSME loans amounts to treating obesity and anorexia with the same medicine
Dr. B. Yerram Raju
The units having sanctioned limits of Rs10 lakh and above, but up to Rs25crore areall bracketed for treatment with a single brush and this is unfortunate

In the din and bustle of mounting non-performing assets (NPAs) that attracted world-wide attention, the Reserve Bank of India (RBI) in its 17 March 2016 circular took up the unfinished agenda of KC Chakrabarty Committee (2007) Report to remedy incipient sickness of the micro, small and medium enterprises (MSME) sector. 

The units having sanctioned limits of Rs10 lakh and above, but up to Rs25crore are all bracketed for treatment with a single brush and this is unfortunate.

The instructions also presumed that all is well with the banks and the MSMEs alone are responsible for their financial failures. Banks, with very few exceptions, stopped cash flow based or order-based lending for working capital of the MSMEs. 

The Nayak Committee norm of 20% of turnover as minimum working capital limit has been taken to be the maximum and not the minimum in the case of several micro and small enterprises.

Some of the reasons for the units falling into SMA-0 category are, inadequate or delayed bank finance, repayment obligations on term loans, which are incommensurate with the cash flows, inadequate startup period for repayment of term loans. Banks would be averse to review their own inadequacies.

The other uncovered area is the adverse effects of (a) long drawn agitations in the States leading to failure of infrastructure like power and water; (b) units affected by natural calamities like the floods, cyclones, and earthquakes that result in partial or full damage to the assets financed. Remedies are not possible within 90 days.

MSME units broadly fall into – stand-alone enterprises; ancillary enterprises and cluster based enterprises. While those in the former category could be having wider markets, ancillary enterprises and even some cluster based enterprises operate in narrow markets. If the anchor industries failed, the dependent MSEs would be a pack of cards in spite of themselves.

The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme extends guarantee cover to units availing limits up to Rs1 crore within certain threshold if the primary lender extends loans sans collateral. It is mandatory to lend up to Rs10 lakh without seeking collateral security. 

Several banks take collateral for term loans and grant collateral free advances up to Rs10 lakh working capital. Once installment or interest becomes overdue beyond 90 days, both working capital and the term loan, the unit becomes NPA and the collateral security gets invoked for realization of all the loans. There is no mention of the treatment of CGTMSE covered loans in the latest circular.

Where the MSE with Rs10 lakh limit are vendors to the large scale, corporate, and medium enterprises also financed by the same bank or the consortium of banks, the failure of these could lead to the failure of the MSMEs within the naked eye of the banks. This is because such MSEs fail to get their bills paid in due time (from large clients) calling for repeated extension of period for repayment. In most such cases, neither the product nor the processes can take the blame. Madhav Lal Committee (GoI, 2013) suggested treating such delayed payment for accepted goods as income in the hands of the company and taxed. This suggestion is worth pursuing.

It is time that the banks incorporate in their loan agreements a clause to recover the MSE dues for accepted goods by debit to the purchaser’s account if the bills remain unpaid beyond the tenor of the bill. In case there are legalities coming in the way, the banks should negotiate for quick resolution of such dues as mediators between the MSE vendors and the large enterprises.

It is obvious that the SMA-0 required 30 days under the extant instructions in which case the NPA for MSMEs need to be redefined to those falling due beyond 120 days and not 90 days. Basel III dispensations provide enough leverage to the regulator to be malleable in the case of SMEs that the RBI can take advantage. Prudential norms and asset classification needs a review.

Further the fees to be paid for the Techno Economic Viability (TEV) study has also been left for the bank concerned to decide. An ailing enterprise may find it difficult to pay for it unless it comes as an interest-free loan repayable as part of the restructured loan installments.

Treatment of dues to the government by way of taxes, cess and duties require coordination with the state governments. This is obviously left for the Board appointed committee to decide. 

The Boards are expected to appoint such committee by June 2016 and the Indian Banks’ Association (IBA) to roll out the needed application forms in the next few weeks. Hopefully, the banks would see the intent of the RBI in expeditious processes in sanitizing the sector.

The most admirable part of the current instruction is the review mechanism highlighted in the annexure that provides opportunity for the aggrieved enterprise to revisit the recovery proceedings for any required correction.

About 14% of the total manufacturing sector credit is reported for the MSEs while 5.9% of the MSE credit has been declared as NPA. Banks mostly cover all the government sponsored accounts, most of which are in the services sector and transport sector under the CGTMSE. There is no information as to how many and how much of the manufacturing MSEs are covered under the CGTMSE and the amount covered under collateral securities. Banks proceeding against the collateral securities under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act seek 10% deposit from the bidders and this acts as a major deterrent for the bidders. The result is that most such bids exhaust all the three chances without bids. The whole process takes three months. The Banks thereafter start exploring other means of recovery or rehabilitation. There are quite a few cases where the banks scaled down the debt or agreed to rehabilitate the unit that was considered unviable three months ago. The new instructions would provide better opportunity for the units confident of revival to press their case without having to wait for the aforementioned rigmarole. 

In the light of these instructions the role and relevance of the State Level Inter-Institutional Committee (SLIIC) needs review by the RBI. The disease is not cured by not naming the medicine but by administering it in right time. Treating obesity and anorexia with the same medicine. 

Tuesday, April 5, 2016

Bi-monthly Monetary Policy can lower borrowing rates

RBI Governor in his first Monetary Policy during the current financial year has cut the key policy rate by 0.25 percent to 6.50 percent and sends the message louder than ever that banks should pass on the rate cut to their clients to pump prime the economy.

In the backdrop of a supporting fiscal policy and pressures built on the cut in interest rates by the government on its savings schemes all the eyes were on the RBI for a cut in key policy rates. The Governor proved that he is not going to be political but economic.

Growth of domestic savings has hit the lowest rate during the last three years. Inflation - particularly food inflation - still is a cause for anxiety in the backdrop of series of monsoon failures. Weather is weather and the hopeful forecast for the current year by the Met Department has to be taken with a grain of salt.

Banks have been provided a liquidity window should they need to use it, easier than ever. He recognized also the inability of banks to go beyond a point in lowering the interest rates due to their pile of NPAs, which he stressed shall move down southwards day after day if not hour after hour.

Banks should discipline themselves and discipline their borrowers and promote growth is the clear message of the policy.