Bitter Truth Of Credit Processing
In Public Sector Banks
And
Bitter Truth of Promoters of Sick Units
In India - Companies Become Sick But NOT Their Promoters !!
by
Pannvalan
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.
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