The Consumer Forum dismissed the claim of Rs5 lakh since the complaint was not filed within specified time limit
If NPAs are not curbed effectively, it will not be long before we in India head the Greek route. The banks should not stop short of opting for strong coercive proceedings under the securitization laws rather than yield to the mirage of CDR
In the west, post-Lehman brothers has brought about new financial jargons like bailout for stressed assets in the USA, here in India they are termed non-performing assets (NPAs). Both simply stand for bad or irrecoverable loans/debts by whatever name they are called.
Moneylife has just carried a cover page report on Loans going bad by a veteran banking analyst and also a series by a former banker. I now add to them from another angle arising out of my over four decades as a central statutory auditor on the Reserve Bank of India (RBI) panel auditing major banks both domestic and foreign.
It needs to be pointed out that no bank loan goes bad overnight. It takes place over a time. Some of them commence at the sanction and disbursement stages, to begin with the inadequately or badly appraised loans or lines of credits approved by the very top management and pushed up-down to the disbursing branches to proceed without proper documentation, securities and guarantees; just rushed through. When they do go sour initially and bad later, the entire inadequacies crop up but then it is too late to enforce recovery proceedings effectively. This gives the defaulting borrowers an upper hand.
Next are the laxities in monitoring at the branch level—the incipient bad borrowings arise more out of the officials not heeding and acting promptly on the red signals leading to irregularities like the borrowers exceeding drawing powers by not submitting inventory or debtors security statements in time, ultimately resulting in the advances exceeding the sanctioned limits to constant overdrawing, resorting to frequent TODs, bouncing of cheques for want of funds. If only the branch had reported to the controlling authorities the irregularity instead of seeking ratification of allowing it to happen could the warning signals of impending NPA have been resulted by nipping it in the bud by putting an effective brake. Branches tend to take operational irregularities lightly or act routinely only to wake up when the outstandings mount when it is too late.
The RBI panel under its executive director, B Mahapatra while observing that restructuring amounts to an “event of impairment” whether or not its asset classification undergoes a downgrade, has rightly recommended that all loans that are subjected to restructuring should necessarily be classified NPAs as they are in fact sub-standard and not standard which by any stretch of imagination they are not. More particularly when restructuring requires the banks to take a hit by granting concessions like substantial reductions in interest rates, moratorium or elongation of repayment schedule, part waiver of principal and/or interest or converting debt into equity at inflated values a la Kingfisher. There is absolutely no valid justification to make any such distinction that only obfuscates the underlying problem of mounting bad debts! When internationally accepted accounting standards treat restructured advances as impaired they is no reason for Indian banking to deviate from the prudential accounting practices primarily from the transparency perspective.
The RBI’s suggestion of a two-year “regulatory forbearance” for withdrawing the standard classification benefits needs an urgent recall. Notwithstanding this, the banks need to explicitly start recognizing these loans as NPAs as they have suffered considerable diminution in the realizable fair values of the securities assigned to cover them. They have necessarily to be recognized and also provided for entirely in the year of occurrence. It is certainly not correct to defer it to future years when the profits of subsequent years take the hit. The RBI shouldn’t venture into the realm of prudent and accepted international accounting practices by suggesting such deferrals.
The Bank Statutory Auditors, in helping out the bank managements to window-dress their annual accounts to overstate the profits for the year, have, in my considered opinion, wrongly misinterpreted the RBI guidance for deferrals. This is equally applicable to the RBI guidelines for recognizing and providing for the accrued gratuity and pension liability. The bank auditors are under wrong impression that they can get away by merely stating in their auditors’ report—“Without qualifying our opinion/report, we draw attention to Note...” This is no qualification as it does not explicitly state the liability did and does exist on the date of the balance sheet and the not providing for it impacts the profits for the current year. The RBI’s advisory in merely advising them to defer it over a period of time does not absolve them from providing for and disclosing the liability subsisting and also existing. The RBI as the banking regulator and the ICAI as the accounting regulator ought to review this unhealthy practice of window-dressing that only result in overstating the profits. The regulatory forbearance certainly cannot exceed its brief!
In the two years between March 2009 and March 2011, gross NPAs of our banks shot up from around Rs68,000 crore to Rs94,000 crore. By bringing in the so-called restructuring they have not been wrongly classified as standard—they would have soared from just over Rs60,000 crore to almost Rs1,07,000 crore. The numbers for end-March 2012 are expected to touch a whopping Rs 2,06,500 crore by the banking industry’s restructuring cell.
The Sick Industrial Companies Act (SICA) has been on the statute books for long. Companies are invariably rendered sick by the promoters who are always hale and hearty. The bankers deal with them with kid gloves by hesitating to make demands on large industrial chronic defaulters. The Securitization & Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2005 (SARAESI), empowers lending banks to seize mortgaged assets of recalcitrant borrowers to realise the best prices without having to resort to court sanction. It is found that it is most commonly applied to small time borrowers like those who have defaulted on EMIs for home loans, vehicles loans, small time traders that it tantamounts to using a sledge hammer to swat a fly and not recover from the large chronic defaulters.
The big ticket defaulters manage to keep out bank attachment orders by obtaining court stay orders. High profile borrowers like Kingfisher just apply any tactics to keep lending banks at bay. This is simply because the banks and the RBI are found to be speaking with forked tongues. They blow hot and cold at the same time, all the time they are caught pussyfooting—a case of willing-to-push-but-afraid-to-hurt attitude of not touching the big guns, but attaching small owners or traders. Proving right the good old Hindi adage—Hathi janey dega, magar doom pakadke ke baitega—translated letting the elephant pass through only to cling on to its tail.
The standard of toughness of recovery proceedings are strong with small retail borrowers where the flat and vehicle are attached with ease. The bank attitude generally is in keeping with the refrain that when one small entity borrows a couple of lakhs from a bank, the borrower will be in trouble, but when one big ticket borrows crores, it is the bank which is in trouble as the banks resort to molly coddle the big time borrowers to collect their dues.
To minimize NPAs the RBI to direct the banks to put in place real tough measures of going for the defaulters’ jugular. Insist on personal guarantees and call upon the promoter-directors of public companies also to sign personal guarantees, as is done with private unlisted entities. This is because the promoter clan takes the company’s stakeholders and bankers for a ride after collecting money from initial public offers (IPOs). They should be required to bring in margin money for the lines of credit in hard cash and not by pledging shares of group companies and/or providing their corporate guarantees that are equally dud. They should be asked to cough up not less than 25% of the value of the diminution in the value of securities and/or 10% of the sanctioned limits before even considering any reschedulement in the rescue act. The end use of the borrowed money has to be strictly monitored to ensure there is no misuse thereafter.
The rising NPAs call for drastic strong arm twisting corrective action. The RBI should do well to call upon all banks to furnish a listing of their Top 100 defaulters with a brief on the ages, causes and steps initiated to effect recoveries. The banks and the RBI should make available the listing on their websites along with the progress report on the reduction or otherwise. Most of the defaulters will be found to be big names with strong pull right up to the ministry of finance (MOF) and capable of pulling all strings to keep action at bay. The banks should not stop short of opting for strong coercive proceedings under the securitization laws rather than yield to the mirage of CDR.
If NPAs are not curbed effectively, it will not be long before we in India head the Greek route. The MOF, now under the PM has necessarily to leave the micromanagement of the banking sector to the RBI.
Best assign this task to Dr YV Reddy—the tough acting former RBI governor!
(Nagesh Kini is a Mumbai-based chartered accountant turned activist.)
The microfinance crisis of 2010 underlines the urgent need for balanced but effective regulation/supervision in India with regard to microfinance investment vehicles (MIVs). The powers that be in home and host countries should attend to these issues in an expeditious manner
Hugh Sinclair’s recent book has been controversial for many reasons but as I have said in my previous articles (Why blame the MFIs alone?; Should not microfinance investment vehicles be judged by the same standards set for retail MFIs?; and Does Sinclair’s Open Challenge (to the Global Micro-Finance Industry) Make His Claims True?), many of his assertions (concerning the microfinance investment vehicles or MIVs) have solid irrefutable evidence in the public domain. Thanks to Hugh Sinclair for alerting us on how MIVs actually operate in real time!
That said, ever since I read Hugh Sinclair’s book, I have been intrigued by the MIV phenomenon. And true to my nature, I started some research on MIVs using the Luminisi database (https://www.luminismicrofinance.com). While the database is a good start to having information on MIVs, however, even there, I found little information on specifics regarding regulation/supervision of these MIVs. In fact, as I searched around, I realized that there is very little credible information on how (many of these) MIVs are regulated and supervised in real-time. And this indeed becomes a matter of concern when you consider the fact that a significant number of MIVs (as many as 43 of the 100) are incorporated either in Luxemburg, Mauritius and/or Cayman Islands (as is evident from the data given in Table 1 below).
It must also be noted with interest that there are very few MIVs incorporated in large microfinance markets like India. What needs to be appreciated here is the fact that most of the MIVs have registered domicile in countries that offer little potential for microfinance—in very broad terms, over 75% of the MIVs are registered in (home) countries that have very little micro-financing in the first place. Whether or not, this is a case of regulatory arbitrage is a question that begs an answer indeed.
This apart, it should be noted that MIVs have been incorporated as very diverse legal entities and this again raises the aspect of regulatory arbitrage. Therefore, without any doubt, the onus is perhaps on the regulators in the recipient countries to understand from where exactly is the (foreign) money flowing into the microfinance sector (in their respective countries) along with the motivations for such investment.
In fact, during the Indian microfinance crisis, I realized that India’s central bank (Reserve Bank of India) perhaps did not have (in one place) all the requisite information with regard to foreign equity and debt flow into the Indian microfinance sector. And as I have previously mentioned, (and as Mix Market has so eloquently put it), it is the unique combination of significant equity flows (and debt funds) from abroad with local banking funds and their subsequent and continuous investment as “microfinance loan assets” that created the perfect storm for the Indian microfinance crisis. It is precisely this that regulators have to guard against globally.
So, what needs to be done in tangible terms by regulators in host (recipient) and home countries?
First, the central banks in the recipient (host) countries must become the focal point for foreign investment (debt and equity) flows into microfinance. When this information is dispersed and scattered, it becomes rather difficult to gauge what is happening, what the key trends are in terms of MIVs who are investing, which MFIs attract significant investments and why and so on. Therefore, it is imperative that the central bank in every recipient country becomes fully aware of foreign debt and equity investment into their MFIs. And for this to happen in real-time, the central bank must allocate specific staff (team or unit) within a department to focus on this (perhaps, even exclusively in countries like India that have a huge untapped microfinance market).
Second, the primary work of this team (or unit) should be to help create a reliable and valid database with regard to foreign investments (equity and debt) in microfinance. Such a database, apart from providing statistical information on foreign fund flows, should also help to answer questions such as (but not limited to) the following:
Third, whenever the potential for regulatory arbitrage exists, balanced coordination among regulators is necessary and this needs to be achieved across home and host countries. Together, the regulators would need to look at issues such as (but not limited to) the following:
The Bank for International Settlement (BIS) could perhaps be entrusted with this enormous task—of helping to create a coordination mechanism among central banks as well as facilitating the establishment and implementation of regulatory and supervisory standards for MIVs globally—as they have the ability, expertise and perhaps objectivity to get involved in something like this.
Colleagues and friends, we simply cannot afford another microfinance crisis anywhere else in the world. Or put differently, we should neither allow MIVs to behave as irresponsibly as they did in India (in the years preceding the 2010 microfinance crisis) nor permit them to be as indifferent as they have been in the case of LAPO, Nigeria. That they have not learnt from the past is very evident from the following news item (19 July 2012):
“NIGERIAN microfinance banks may soon be recapitalised to the tune of $30 billion about (N4.7 trillion), as nine investors have announced their willingness to inject more fund into the sector. The $30 billion fund that may come in the form of grants to the banks would be provided by Blue Orchard; Alietheia Capita, Bank of Agriculture (BOA); Patners for Development, Nigeria Capital Development fund, French Development Agency, Proparco, PlaNet Finance, and African Development Bank (AfDB).ii
And the moment I saw this news item, I said it is about time that we start to seriously look into how MIVs operate with the objective of bringing in balanced and transparent regulation and supervision for these MIVs. While not an easy task, it is something that needs to be attended to with speed, efficiency and significant coordination among regulators across home and host countries! Otherwise, we will continue to debate issues with regard to microfinance crisis situations in terms of MFIs alone—something that would be tantamount to treating the symptom rather than the real cause of the disease. Let us make no mistake about that!
To summarize, some may argue that regulation/supervision of MIVs is not important but take a look at what happened in India in 2010 (Andhra Pradesh Micro-finance Crisis; and Lessons from the commercial micro-finance model in India). Without any doubt, the 2010 Indian microfinance crisis provides a good basis for why there is an urgent need for balanced but effective regulation/supervision with regard to MIVs. And Hugh Sinclair’s (brave) book again clearly demonstrates a (serious) regulatory gap vis-à-vis MIVs. Therefore, given the above and also given the regulatory arbitrage aspects discussed here in this article, there is no doubt that MIVs require minimum (standards of) governance, management, systems and disclosure—through balanced regulation and effective supervision. This will ensure that they are not only accountable to end-user clients (like low income people in host countries) but also to the primary investors (in their home countries), whose hard earned money certainly needs to be safeguarded (and not frittered away).
I sincerely hope that the powers that be in home and host countries start to attend to these issues mentioned in an expeditious manner…
(Ramesh Arunachalam has over two decades of strong grass-roots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural and urban development and urban poverty alleviation across Asia, Africa, North America and Europe. He has worked with national and state governments and multilateral agencies. His book—“Indian Microfinance, The Way Forward”—is the first authentic compendium on the history of microfinance in India and its possible future.)
iI do believe that there are more MIVs than those listed in the Luminis database.ii Source: Quoted from Microfinance banks may receive N4.7tr grant from nine investors, by Joke Akanmu, Abuja, 19 July 2012 (http://www.ngrguardiannews.com/index.php?option=com_content&view=article&id=92748:microfinance-banks-may-receive-n47tr-grant-from-nine-investors&catid=31:business&Itemid=562)