21/06/2017
Recently I have undertaken an assignment of dealing with the legal proceedings initiated by three nationalized banks under SARFAESI Act of a Corporate Company who are service providers to infrastructure projects initiated by the State Governments and Central Government and some of them are being financed by World Bank and Asian Development Bank. The Company has been sanctioned huge limits under multiple banking systems and they were doing well till recently with huge turnover and serving the interest and installments regularly. Since middle of the year 2015 they started facing liquidity problems because of which they could not keep up their financial commitment to their banks. All the three banks classified the account as NPA since 2016 and initiated recovery proceedings by invoking SARFAESI Act. On receipt of the notice u/s 13(2) of SARFAESI Act the Company approached me and I am handling the assignment of dealing with the three bank cases.
I undertook a thorough analysis and assessment of company’s performance and based on my study I sought the certified copies of documents executed by the Company and also clarifications / explanations including the norms under which the accounts were classified as NPA. Seeking documents and other details were based on RBI notifications through various circulars and law and practice of baking. Till writing this article no convincing response has been received from any bank even though they have submitted a vague and non specific reply which by itself is an admission of whatever that we have stated in our letter as per Civil Procedure Code and which has created a handicap for me as well as for the company to deal with the case effectively.
My observations from the available records with regard to banks’ credit sanctions and credit monitoring are as follows.
1. All the banks have overlooked RBI “Guidelines on preventing slippage of NPA accounts” and RBI guidelines on “Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy” in spite of the company’s request for forming Joint Lenders Forum (JLF) and convening a meeting to resolve the NPA issue. Both the aforesaid guidelines are to be undertaken before the classification of account as NPA.
2. The banks has not furnished their respective assessment and appraisal report in spite of being asked on a lame excuse that it is an internal matter of the bank and not for public consumption which is against the transparency policy of bank dealings advocated by RBI. Hence, I have undertaken an appraisal considering the RBI directive that “The strategy for management of NPAs may be governed by the circumstances connected to each individual case. Generally, the NPA is more likely to be resolved in terms of recovery if the company is in operation. For this to be effective there must be a system of identifying the weakness in accounts at an early stage.” Company’s operations with two of the banks are stopped completely with one of the banks allowing operations with 20% of each credit made into the account being adjusted towards recovery. My thrust area of assessment is focusing on the cash flow from the operations taking into account RBI guidelines “While financing, at the time of restructuring, banks may not be guided by the conventional Funds Flow Analysis only, which could yield a potentially misleading picture. Appraisal for fresh credit requirements may be done by analysing Funds Flow in conjunction with Cash Flows rather than only on the basis of Funds Flow” for which the operational cycle of the business plays a very important role particularly that of debtor’s realization. Since the cash flow and fund flow depend upon the operating cycle of the business, I find that while inventory turnover and payable turnover are satisfactory, the accounts receivable (debtors) turnover is creating the real problem. The debtors are none other than state and central government departments. Huge payment receivables got stuck up with various state and central government departments which has created the liquidity problem because of which the financial commitment of the company could not be met with.
3. The company has executed a general Power of Attorney in favour of the banks to undertake any action that the banks may deem fit which includes proceedings against the debtors for the realization of their dues to the Company. The banks only wrote some letters to the concerned departments for the payment of the pending bills but did not take any action against erring government departments. The banks simply pleaded their inability to get the payments. Thus it is obvious that realization of outstanding payments from the government departments is beyond the control of both the lenders and the borrower. Yet the banks without finding any way for the resolution of NPA accounts, they invoked the provisions of SARFAESI Act and issued notice u/s 13(2) of the Act.
4. The company is registered as a small scale service enterprise and as per SME Act, 2006 various provisions including payments and charging of interest for the delayed payments are stipulated for making payments to Micro and Small Enterprises towards the sale of products and providing services to various buyers. In the current context the debtors are state and central government departments who break the provisions of SME Act which has created a NPA and then condemns their own creation.
5. The company has to participate in the tenders floated by various government departments for the projects coming under infrastructure for which bank guarantees are to be provided to participate in the tender bidding. The main bank not only reduced the limits while renewing the facilities drastically because of which the company could not participate in many of the tenders and they lost huge orders and thereby the performance and the cash flow have been affected very badly.
6. The banks by denying the discovery and production of documents and not explaining and clarifying the various points raised by me have violated Charter of Customer Rights released by RBI wherein it is stated, “Right to Transparency, Fair and Honest Dealing” which further states, “: The financial services provider should make every effort to ensure that the contracts or agreements it frames are transparent, easily understood by and well communicated to, the common person. The product’s price, the associated risks, the terms and conditions that govern use over the product’s life cycle and the responsibilities of the customer and financial service provider, should be clearly disclosed. The customer should not be subject to unfair business or marketing practices, coercive contractual terms or misleading representations. Over the course of their relationship, the financial services provider cannot threaten the customer with physical harm, exert undue influence, or engage in blatant harassment.”
The crux of the problem is that the banks have not diligently and realistically assessed the cash flow upon which the repayment of installments and interest rest. No crisis management plan of action has been formulated. Effective credit monitoring was lacking in spite of the fact that the branch is having concurrent audit. Since RBI inspection report on the bank branch inspection is not made available, it is not known how RBI has dealt with the loan portfolio of the branch and their observations on credit monitoring. The various Government departments also do not seem to have taken any concrete steps to mitigate the liquidity crisis created by them being faced by both the bank and the borrower.
Considering the aforesaid facts of the case A Pandora’s Box has been opened. Who is to be blamed?
(a) Is the borrower to be blamed for undertaking government projects? (It may be noted that the banks’ biggest NPA accounts belong to infrastructure and core industry projects.)
(b) Are banks to be blamed for not having assessed and appraised the projects implementation diligently and not having undertaken effective credit monitoring?
(c) Is RBI as financial policy maker responsible for not having undertaken any steps to influence the various government departments to release the funds on time?
(d) Are the government departments responsible for creating the NPAs by not releasing the funds of the projects undertaken by them particularly funded by World Bank and Asian Development Bank?
But the reality is that the banks have taken action by invoking provisions of SARFAESI Act to recover the dues and perhaps they may even not hesitate to declare the company as wilful defaulter unmindful of the relationship with the company for more than a decade and the income earned out of the transactions. Perhaps they may resort to invoke The Insolvency and Bankruptcy Code, 2016 and implement NPA resolution through RBI. The system that is being followed is that the borrower is the sole villain in creating NPA in the banking system. The entire system and procedures are implemented ruthlessly on the borrower without proving whether he is a wilful defaulter or not leaving no chance for survival who has become a victim of circumstances beyond not only his control but also the control of the banks. Yet he is the only one who is being punished. I have experienced during my various consultancy assignments that the government, the RBI, DRT and even the courts are in favour of the bank being the custodian of public funds irrespective of fact they violate with impunity the provisions of law, RBI directives, Banking Codes and Standards and make the borrower solely responsible for the creation of NPA with a very few exceptions.
There have been various laws enacted and RBI guidelines issued from time to time to tackle the ticklish question of NPA but instead of reduction in the NPA level, the trend has been showing unabated increase in NPA threatening the economy of the nation and health of the banks and financial institutions. Such being the case, can the latest The Insolvency and Bankruptcy Code, 2016 and NPA resolution through RBI be the panacea for NPA reduction? In my opinion unless the following aspects are tackled, NPA cannot be arrested and kept to the minimum affordable level.
1. Give the bank management full power to take commercial decisions without fear or favour by removing the fear psychosis prevailing in the banking sector on account of vigilance and CBI probing loom largely as Damocles Sword.
2. Find out whether the borrower is a wilful defaulter or not and if he is a wilful defaulter, then take stringent action against him to recover the dues without any fear or favour and unmindful of who are the people involved.
3. Effective credit monitoring system is to be implemented by the banks for which the employees and executives are to be trained on a continuous basis.
4. Most importantly the assessment of financial needs and timely availability of funds on a continuous flow of credit to be ensured without fail. Since financial commitment of the borrower depends upon cash flow out of the business process which depends upon operational cycle of the business process, realistic cash flow is to be determined at the time of assessment and appraisal after weighing all aspects of risk management along with a contingent plan at times of crisis.
5. Educating the borrower about the need for financial discipline and to make them understand the complexities of banking law and practice and the complimentary roles that the bank and that of the customer.
6. Introducing a recovery of bank dues with a human touch for honest borrower with integrity whose account becomes NPA due to circumstances beyond his control.
I am waiting with my fingers crossed as to what could be the end result regarding the cases of my client even though we have taken all possible steps for the resolution of NPA for which we have sought the co-operation and help of the banks and also the government departments without which the company cannot come out of their problems and predicaments. If the crisis is not resolved amicably, the resultant implications would be affecting the completion of the ongoing projects, deprival of the livelihood of multitude of workers engaged in the projects directly and indirectly, employment deprivation, loss of huge capital invested in the projects by the promoters of the company and other collateral damages that may be caused. This is not an isolated case but there are many such cases to be tackled effectively with a human touch. Will the system take proactive action?
Two very important judgment of Apex Court of India would be the guiding factor in determining the resolution process of NPA. They are:
(a) Rehabilitation takes precedence over recovery.
(b) Loss of huge investment in business and loss of employment and depravation of livelihood of the people should not be overlooked while undertaking resolution of NPA.
Last but not the least; I raise a pertinent point to ponder by righteous thinking people:
Does our country’s biggest White Elephant, The Air India, which is being kept floating and flying by inducting huge public money by the bureaucrats and public servants with impunity over decades not come under purview of the NPA Resolution norms and scheme?
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About the author
HIMANSHU TIWARI
CHARTERED ACCOUNTANT
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