Thursday, October 25, 2012

Bitter Truth Of Credit Processing In Public Sector Banks

Bitter Truth Of Credit Processing 
In Public Sector Banks 
Bitter Truth of Promoters of Sick Units

In India -   Companies   Become Sick    But   NOT   Their  Promoters !! 


 When Sick Industrial Companies Act was enacted in 1985, some questions were repeatedly asked in CAIIB examinations at that time.  Some of them were:

1.                 > What is the definition of a ‘Sick Company’?
2.                 >  What are the possible causes for a company to become sick?
3.                 > What are the measures to be taken to prevent a company from falling sick?
4.                 > What are the rehabilitation measures to be taken for making a sick company ‘turn around’?
5.                 > What are the ‘early warning signals’ that can be noticed, in case of a company that is slowly turning sick?
6.                 > What are the recovery mechanisms and tools available to a lending banker or a group of lenders, in case of a sick company that cannot be rehabilitated?

While answering one such question, I wrote thus:    “In India, Companies become sick, but not their promoters”.

The reasons are only three –

(a)   The personal wealth amassed by the promoters in course of time remains untouched or it keeps growing by leaps and bounds, regardless of the health of the company/companies they manage.  Because their liability is limited to the extent of the value of shares held by them (as per legal definition), they enjoy legal protection.
(b)   A person or a group of persons who manage many companies simultaneously are permitted to continue on the boards of other companies, even after one of their companies turns sick.
(c)   There is no legal disqualification or embargo on a promoter/director of a failed company to start a fresh venture with public money or with borrowings from banks and financial institutions.

These are the major lacunae in our system.  To add insult to the injury, such corporate delinquents are rewarded with many more reliefs and concessions in the form of interest waiver, restructuring of term loans, funding of unpaid interest on working capital finance through FITL, reduction of margin, increase in the age of book debts eligible for finance, reduction/waiver of other charges like processing charges, BG/LC Commission, relaxation of collateral security norms etc.

Due to stiff competition from other market players, banks are nowadays very slack and not particular about the extent of collateral security to be taken from big borrowers.  It is ironical while small borrowers are harassed with regard to third party guarantees and collateral securities, the same banks cannot be equally harsh or insistent when it comes to lending to powerful individuals and corporates. 

From my own experience, I wish to quote this.  I was scolded and insulted, when I had mentioned in one large advance appraisal that the collateral security extended was ‘Nil’ or ‘Negligible’.   I was given lessons on the market realities and the type of competition we were facing.  A question was posed to me: “If you are so rigid, how can our credit portfolio will ever grow?”.  So, the message was very loud and clear.  As I did not budge, I was abruptly transferred.

I have seen some bizarre and funny things also in this respect.   They require a mention here, for the benefit of my fellow bankers.

1.    (a)  While extending finance to a company, a bank readily accepted the promoters’ equity shares in the same company as collateral security!
2.    (b)  While arriving at the Net Worth of a company, usually the investments made in the subsidiary or associate companies are excluded.  But, many bankers prefer not to do that, so as to favour some companies.

3.    (c)  Similarly, disputed claims/liabilities or huge contingency liabilities not provided for are deducted while arriving at the Net Worth.  But in practice, this is not followed.  This is deliberately done with a view to favour those companies.
4.    (d)  In another case, a company showed profit, by showing profit on (fictitious) sale of assets, another by transfer from general reserves to Profit & Loss Account and yet another by not providing for depreciation as per law, for many years in a row.

5.    (e) In another classic case, a very big company having billions of Rupees as yearly turnover did not show the Closing Stock of the previous year as the Opening Stock of the current year.  They showed inflated opening stock for the current year.  Thus they were able to boost the profit figures very cleverly.  (In my Excel Sheet, I have a cross check for this).
6.    (f)  Many companies, I have noticed, prepare two sets of financial statements – one for filing with Ministry of Corporate Affairs (ROC) and another for the lenders.  In some cases, a third set is also prepared for income tax purposes.  It is a well known secret in the banking circles.  The cruel joke here is all the three sets are certified and authenticated by qualified chartered accountants (different people/firms).  Then, what kind of credibility these financial statements will have?  
It is pertinent to recall here the case of infamous Satyam Computer Services of Ramalinga Raju. 

7.    (g) When a banker expressed his dissatisfaction regarding the financial health of a company who came to him with a credit proposal, the company without any second thought offered to replace the audited and published balance sheet with a fresh one, to suit the needs and expectations of the banker!
8.    (h) Many companies do not hesitate to throw lavish parties to the decision-makers in a bank to achieve their ends.  I wish to quote one relevant incident.  The CMD of a bank on the eve of his retirement visited metro city  and a brand new Hyundai car was gifted to him by the local diamond merchants (who enjoyed credit facilities with the bank). Similarly, when the  Zonal Manager in the metro city retired, his wife was presented a Diamond Necklace worth a few lakhs of Rupee.

9.    (i) When a lower level officer/manager points out the negative features in a credit proposal, in which some influential persons are interested, that officer/manager is transferred and in his place, a more pliable person is brought in.

10.  (j) If the name of some directors of a company/firm figure in the RBI’s ‘Caution List’ or ‘Wilful Defaulters’ List’, the bankers themselves suggest to those persons to execute an ‘Indemnity Bond’ declaring that they are not the ones figuring in such negative list.

11.  (k) A person who has cheated a bank will first change his location and then start an altogether different activity and approach the bank/s at the new place for finance. 
12.  (l) In another instance, I saw the same person having two different surnames – one in his latest Income Tax statements and the other in his loan application submitted to the bankers.  Needless to say, his account became NPA in course of time (It was processed by my predecessor).

13.  (m) In some states in India, it is quite common for the women acquiring a totally new name after their marriage (many a time much against their wish).  This becomes convenient for their husbands to utilize their newly acquired identity to cheat the banks.  This is made easier, when these women relocate to a far off place, after their marriage.

14.  (n) Banks simply queue up to finance one reputed industrial group company, regardless of its merits with regard to technical feasibility, economic viability and compliance with thegovernment policies and the individual banks’ own credit policies and priorities.

15.  (o) In case of a small proposal, if the long term solvency ratio exceeds 6, it is liable for rejection.  But, in one very large advance, this ratio (TOL/TNW) was at 46 and yet, the proposal went up to the board/MC and the limits were eventually sanctioned, throwing all the established norms to the wind.

16.  (p) When a proposal passes through several stages/offices, even in case of failure of the advance, no one is touched.  But can such a guarantee be given for limits sanctioned by the branch managers within their delegated powers?  Will not they be tormented to the hilt?

Many more unethical practices and accounting frauds are perpetrated with the help of chartered accountants, tax authorities and the lending institutions.  

When a big advance fails, the losses have to be borne by everybody in a bank.  Stringent austerity measures are imposed.  The post Harshad Mehta scam and Bhupen Dalal scam period may be recalled here.  But, these austerity measures are only for the small people.

There is no scrutiny from an outside agency like CAG for the amount spent on board meeting expenses, hospitality to large clients, foreign jaunts of top management officials etc.  By curtailing small legitimate expenses at the field level, the top executives continue to enjoy their luxurious way of life at the cost of the bank.

If some serious action from RBI or Ministry of Finance is contemplated, these people put up their papers in advance, citing ill health and quit.  Thus they escape from the punishment they deserve.  In many cases, these persons after spoiling the financial health of one bank, manage to join the board of another company or government department with added privileges and perks and enhanced social status.

As long as these things happen, only the poor gullible masses and the bank employees have to bear the brunt of any big loan losses.

To prevent such undesirable events, I suggest these –

1.    (1)  Banks must be compelled to disclose in their balance sheets and annual reports about the losses and sacrifices suffered beyond a certain amount (say, Rupees One crore in one particular account or a group of related accounts), on account of restructuring, one time settlement under compromise and write off.
2.    (2) Individual cases reported as above must be investigated by an agency like CAG so as to find any possible link between the beneficiaries (!) and the decision makers.

3.    (3)These balance sheet disclosures and the investigation report must be covered under ‘Right to Information Act’.
4.    (4) The beneficiaries of the banks’ generosity in this connection must be legally disqualified to approach the general public or any other banker for the rest of their life.  

5.    (5) By extension of the same logic, their close relatives also may be barred from raising funds from the general public and the financial institutions for any purpose whatsoever.

I have a few words of caution to my fellow bankers.

1.    (i) Do not obey the unlawful instructions of your bosses, fearing retribution. 
2.    (ii) I always tell my colleagues and sub-ordinates: deviation from the procedures is one thing and violation of law is another. For the latter, there is no excuse at all.

3.    (iii) Remember, you have many more years of service left in your bank, whereas your top brass will continue in your bank for only a few years.
4.    (iv) There is nothing wrong or shameful, if you yourself apply for a transfer from a sensitive place or position, before you are transferred to a hard-living area, if such a situation develops.

5.    (v) Unfortunately, an honest officer like Ashok Khemka, who received 41 transfers in his 21 years of service, is not appreciated by his own colleagues, leave alone the society.  Such person is branded as one who does not know the ‘knack of adjustment’. 

Thu, Oct 25, 2012 at 21:39

NPA situation may worsen in next 6-8 months

According to the sources in the finance ministry the NPA situation is set to get worse. Over Rs 3 lakh crore of loans due to projects stranded for approvals can get NPA status in the next 6-8 months.

According to the sources in the finance ministry the NPA situation is set to get worse. Over Rs 3 lakh crore of loans due to projects stranded for approvals can get NPA status in the next 6-8 months.

If permissions for land or environment or fuel linkages don't come in quickly then the officials say they are pinning their hopes on the National Investment Board which they hope will ensure faster clearances.

No comments: