Money & Banking
Need for immediate crack down on high flying wilful defaulters –Part I

Now that the RBI governor has spoken his mind, it is time that our banks to take it as a cart Blanche to go hammer and tongs against large numbers of wilful loan defaulters to move ruthlessly at them. This is first part of a two part series

Finance Minister P Chidambaram, speaking on 6 March 2014 after a performance review meeting with public sector banks (PSBs) and financial institutions, stated, “Non-performing assets (NPAs) at end of March 2013 were 3.84%. For March 2014, it is likely to be higher... They will have to focus on asset quality, credit appraisal and also on recovery... Banks have managed to recover Rs18,933 crore during April-December 2013 and accounts worth around Rs22,000 crore have been upgraded.” On an earlier occasion, he had said, “We cannot have an affluent promoter and a sick company. Promoters must bring in the money. We wish banks take firm steps to recover NPAs.”

The last part relating to ‘upgrading’ is rather disconcerting as the methods employed by the banks tantamount to pure and simple window dressing of their bad accounts. The commonest of them is back door write-off of substantial portions or parts of the stressed loans by adopting the corporate debt restructuring (CDR) route by resorting to restructuring them under a fresh nomenclature called “re-greening” without classifying them as NPAs. While this can hold well in cases of genuine business downturns, it shouldn’t be blatantly applied across the board for cases of massive wrong doings like Kingfisher Airlines and Lanco Infra.

This has given rise now to two patently unhealthy practices that should not be permitted, a) relieving promoters of personal guarantees and b) conversion of debts into equity as they go contrary to Reserve Bank of India (RBI) governor Dr Raghuram Rajan’s assertion upon taking charge on 4 September 2013 that “the promoters do not have the divine right regardless of how badly they manage an enterprise nor the right to use the banking system to recapitalize their failed ventures.”

a) Relieving wilful defaulting promoters of personal guarantees, more particularly of those promoters, who have already feathered their own nests using bank funds, deliberately do not pay despite adequate cash flow and enough net worth, siphon and dispose off borrowed funds, misuse sale proceeds of assets, constantly falsify hypothecated stocks and debtors, fudge books of accounts and inventory records, misrepresent and falsify, remove securities without the knowledge of the banks and indulge in patently fraudulent transactions.

b) Conversion of debt into equity at absurd valuations to reduce the outstanding dues only that result in diluting the valuable tangible security into being left holding absolutely dud, much below par shares as investments. The delinquent managements will be only too glad to be done with the worthless shares by reducing their equity holdings as was done again by Kingfisher Airlines and Lanco Infra by bringing down substantially their holdings to as low as 25% from 66%.    

The Rajan effect

In a full page interview to the Economic Times while speaking about RBI’s priorities, the RBI governor Dr Rajan very rightly pointed out that he cannot “ignore the fact that India has changed and to use those same rules of the thumb, I think creates problems.. If uncertainty has increased, you will have more restructures but we have to be careful that those restructurings are genuine and not strategic and do not occur because of malfeasance. The public in many ways does pay a price for restructuring because these are public sector banks that are taking the hits on the debts they have given. The public has the right to know that their money is being used in a fair way.”  

Shilpa Sinha, in her article “Revolution on Loan restructuring” writes about “Good reasons if the RBI governor has his way in transforming the banking system and treats loan recast and defaulters.” She goes on to quotes his interview – “I think they have to make their decisions without fear or favour…Inefficient management teams have to be thrown out and lenders’ rights over ownership of defaulter’s assets have to be established.” 

Now that the RBI governor has spoken his mind, it is time that our banks to take it as a cart Blanche to go hammer and tongs against large numbers of wilful loan defaulters to move ruthlessly at them. The list of names of NPAs is already in circulation has to be put out in public domain along those of restructured loans. 

Immediate crack down of high flying wilful defaulters required

The Mahapatra Committee appointed by the RBI require corporates seeking loan structuring to heighten promoter’s stakes by not less to 25% of the reduction in the value of security. This is in toughening the banking regulator’s stance seeks to curb bankers’ attempts at mollycoddling chronic defaulting corporates, who always deemed it their birth-right to milk banking system. This however, is spelling utter disaster and going to prove that such mindless magnanimity is tantamount to throwing good money at concessional rates after bad money that went to the pockets of greedy directors.  Insisting on unconditional personal guarantees of the directors and pledge of additional shares of the same and/ or other dud companies is not worth the stamp paper they are written on.

Hey days financial boom

The heady financial sectors boom of 2006-2008 kick started the risk equity capital - initial public offerings (IPOs), follow-up on public offerings (FPOs), qualified institutional placements (QIPs), private equity (PE) investments and western foreign institutional investors (FIIs) flooded eastwards consequent upon the meltdown there. This deluged our markets with funds of all hues and colours, legitimate and illegitimate irrespective of enterprise valuations (EVs) resulting in massive bank and institutional lending for setting up and for working capital for inadequately evaluated large projects that perforce fell by the roadside subsequently. Most the banks then did not even appraise the projects adequately by considering whether the borrowers held the required land acquisition, environmental clearances and coal linkages. Borrowers ought to be required to approach lenders with revival plans at a much earlier stage of the stress, as is the practice in the US.

(Nagesh Kini is a Mumbai based chartered accountant turned activist.)



Khaja Mohiuddin

3 years ago

Unless and until Govt of India, Reserve Bank of India and Board of Directors of Banks sit with the Judiciary and appraise the judicial authorities the seriousness of the bad loans and its effect on the banks functioning and image before the customers, to enable them to bring laws for immediate seizure of all assets to clear the bank loans-dues and over dues. Government and RBI to come down heavily on war footing to recover bad loans. The corporates should not be give debt relief under any circumstances.

Shamrao Vinekar

3 years ago

Almost every PSU bank has been robbed by influential class of politicians and industrialists and public money has been looted.This is similar to PSU Airline Air India and ITDC's Ashoka Hotel. Nobody is held accountable and there is no serious attempt to recover the outstanding from defaulters and prosecute them or attach their assets.

Khaja Mohiuddin

3 years ago

The views expressed are very worthy and deserves action for recovery on war footing. The laxity of the officials to be examined and suitable action initiated for negligence and casual approach.

Gopal Sharma

3 years ago

Zenith Birla (India) Limited FD Scheme, Chairman Yeshovardhan Birla is defaulting for Nonpayment of Maturity Amount of Rs.13, 88, 670/- Due on Maturity Date: 15 / 09 / 2013 on F.D.R. No. 52932, Dated: 14 / 10 / 2010 toward GOPAL SHARMA (Prof. IIT) and NILAM SHARMA.
No reply to any of many letters written to Registrar, Zenith Birla (India) Ltd. Praful Shah:
([email protected])
Adroit Corporate Services Pvt.Ltd. 17- 20, Jaferbhoy Ind. Estate,1st Floor, Makwana Road,
Marol Naka, Andheri (E), Mumbai 400059, India
Also to Chairman at registered office of Zenith Birla (India) Ltd.
I do not know what is going on? It is my right to know what happened to my money and the company's efforts for payment of my money due which is Rs.15, 65, 310/- due now on 15 / Mar / 2014 . GOPAL SHARMA



In Reply to Gopal Sharma 3 years ago

In Sahara's case,SEBI has taken up,as it is Listed Company.For Unlisted Company ,way out is to complain to FM & PM & Company Law Board or Ministry of Corporate Affairs ..GOI has to decide controlling Unlisted Companies FD Collections Regularisation Mechanism.

Khaja Mohiuddin

3 years ago

GOI/RBI/Banks to take stock of bad debts on war footing and initiate recovery proceedings.


3 years ago

Excellently elaborated Article. Rangarajan, RBI , has to study deep and issue Elaborate Guidelines to Banks on above Areas, as banks have got accustomed to above explained wrong Practices - to save their Skin.

Sensex, Nifty close at all time high on shrinking CAD: Thursday closing report

Until Nifty closes below 6,315, the upmove would continue

Taking cues from the Asian counterparts, the Indian indices on Thursday made gradual upmove and closed at their all time high. The BSE 30-share Sensex opened at 21,336 while NSE 50-share Nifty opened at 6,345. After hitting the day’s low almost at the same level, both the indices edged higher to hit a high of 21,525 and 6,407. Sensex closed at 21,514 (up 237 points or 1.11%) while Nifty closed at 6,401 (73 points or 1.15%). The NSE recorded a huge volume of 74.49 crore shares.


India's current account deficit (CAD) narrowed sharply to $4.2 billion (0.9% of GDP) in Q3 of 2013-14 from $31.9 billion (6.5% of GDP) in Q3 of 2012-13 which is also lower than $5.2 billion (1.2% of GDP) in Q2 of 2013-14. The lower CAD was primarily on account of a decline in the trade deficit as merchandise exports picked up and imports moderated, particularly gold imports. The data was as per the preliminary data on India's balance of payments (BoP) for the third quarter (Q3), from October-December 2013, of the financial year 2013-14, presented by Reserve Bank of India in Statements I and II.


On a BoP basis, merchandise exports increased by 7.5% to $ 79.8 billion in Q3 of 2013-14 (3.9% in Q3 of 2012-13) while on the other hand, merchandise imports at $ 112.9 billion, recorded a decline of 14.8% in Q3 of 2013-14 as against an increase of 10.4% in Q3 of 2012-13. As a result, the merchandise trade deficit (BoP basis) contracted by around 43% to $33.2 billion in Q3 of 2013-14 from $58.4 billion a year ago.


US indices closed flat on Wednesday. US companies added 139,000 workers in February, fewer than the market estimates, a report from the ADP Research Institute in Roseland, New Jersey showed. Separate data indicated that service industries in the US expanded in February at the slowest pace in four years. The Institute for Supply Management's non- manufacturing index slipped to 51.6 in February from 54 the previous month.


Federal Reserve Chair Janet Yellen vowed on Wednesday to do all that she can to boost the US economy that is running well short of the central bank's objectives.


Richard Fisher, president of the Federal Reserve Bank of Dallas, on Wednesday said he was concerned about "eye-popping levels" of some stock market metrics, and said the central bank has to monitor the signs carefully to make sure another bubble isn't forming.


All the Asian indices closed in the green. Nikkei 225 (1.59%) was the top gainer.


Business activity across emerging markets expanded in February at the slowest pace in five months, weighed down by weaker manufacturing in big developing countries such as Russia and China, a survey showed on Thursday.


HSBC's composite emerging markets index of manufacturing and services purchasing managers' surveys slipped for the third month running to 51.1 in February. It stayed under the 2013 average of 51.7 and well below a long-run level of 54.0.


Based on data from purchasing managers at about 8,000 firms in 17 countries, the survey showed Chinese factory output stayed below the 50 mark. Manufacturing in Russia, India and Brazil hovered just above 50.


European indices were trading in the green while US Futures were trading marginally higher.


A two-day meeting of Bank of England's Monetary Policy Committee (MPC) ends today, 6 March 2014, to decide interest rates in UK. Policy rates are expected to remain unchanged at record low.


UK house-price growth accelerated in February to the fastest in almost five years as the economic recovery strengthened, boosting demand for property.


Maharashtra SCIC illegally transferred three SICs?

According to an activist, there is no provision for transfer of information commissioners under the RTI Act and yet Maharashtra CIC Ratnakar Gaikwad transferred three SICs in 2012


Right to Information (RTI) activist Anil Galgali has alleged that Maharashtra Chief Information Commissioner (SCIC) transferred three State Information Commissioner (SICs) by impeaching on the powers of Governor.


According to Galgali, on 11 June 2012, Ratnakar Gaikwad, the SCIC for Maharashtra, issued transfer orders for three SICs, Bhaskar Patil, PW Patil and MH Shah. "Bhaskar Patil, SIC at Amravati was transferred as SIC at Nagpur while PW Patil, SIC at Nagpur was transferred to Nashik and MH Shah, was transferred to Pune from Nashik by the CIC," Galgali said.


"However," he said, "the RTI Act 2005, has no provision for transfer of SICs. The power to appoint, or remove SICs are with the Governor. During 2007, Vilas Patil, the then SIC at Nagpur sought transfer to Nashik. A High Power Committee headed by the state Chief Minister (CM) with deputy CM and leader of opposition as its members, recommended to the Governor the transfer of the SIC. The Governor sought opinion from the Ministry of Law and Advocate General of Maharashtra (AG). Since the AG pointed out that as per Section 15 of RTI Act, the Governor can appoint a SIC on recommendations from the High Power Committee."


"After the AG's opinion, Vilas Patil first resigned as SIC at Nagpur, then the Committee recommended his name for appointment as SIC at Nashik. The Governor accepted the recommendation and issued order to appoint Vilas Patil as SIC at Nashik," Galgali said.


He said, "From the above case, it is clearly understood that the post of SIC is not transferrable. By issuing transfer orders for the three SIC, the SCIC Gaikwad overstepped his powers and duties and also impeached the powers of the Governor as well as the Committee. Subsequently, since the transfer postings of the respective SICs are illegal, various orders, or decisions taken by them, by virtue of occupying the position, becomes redundant and illegal retrospectively."


Requesting an urgent intervention by the Governor in this matter, Galgali demanded action against SCIC Gaikwad for over stepping his powers and duties.


Last year in December, following strong protest by activist and citizens SCIC Gaikwad had to withdraw his ‘controversial’ order on blocking access to building plans or other document (like interior plans) to anyone under the RTI Act.


The State CIC, in his order on 26 September 2013 had directed all local bodies in the state not to disclose building plans or other document (like interior plans) to anyone under the RTI Act, citing security concerns.


RTI activists Shailesh Gandhi, who also served as Central Information Commissioner, and Bhaskar Prabhu then filed a complaint against the SCIC order. Both, Gandhi and Prabhu are part of the BMC's technical advisory committee (TAC). The TAC was on the verge of ensuring suo moto disclosure of all building plans, and related documents by BMC.


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