Thursday, March 19, 2015

Restructure Of Bad Loans

I have been writing on pathetic position of Bank's Asset for last five years and more . Assets of bank are not good but it is shown as good by using tools of restructuring of loans, rephasing of loan or by writing off of loans or by sacrificing huge amount in compromise settlement with bad borrowers .But such unethical ways are boon for all.

Latest position on this front is that banks are moving from bad to worse. Now there is immense pressure from Ministry of Finance on Chiefs of each public sector bank to reduce Non Performing Assets and stressed assets , to increase profitability of bank and to arrange for required capital at their own.

Unfortunately banks due to many avoidable or unavoidable reasons cannot recover the money from bad borrowers or from ill-motivated wilful defaulters . I do not want to discuss the same every now and then . The reasons are well known to all regulating agencies as well as to bank officials.

It is the need of bankers to restructure stressed loan so that none from MOF or from RBI or from media can point out accusing fingers towards Bank's quality of performance and investors continue to invest in bank's share.

It is not important for bankers or for clever, selfish and corrupt politicians ruling the country that money is to be recovered from bad borrowers, the important for bankers as well as politicians is to save skin from MOF and investors who trusted banks. And the most important and key reason behind large scale restructure and writing off of loans is that bank officers want safe exit from bank and early promotion to higher position by hook or by crook.

And the automatic benefit which is likely to accrue to top officials by way of such manipulation is large incentive top officials will get in cash from the government for charming balance sheet and for attractive dividend they give to government. There is proverb in Marwari group"hing lage na phitkari, rang choukho aye"

This is why companies like Bhusan Steel has not to do much exercise for rephrasing and restructure of their bad accounts, it is bankers who want not to consider advance to the tune of Rs.40000 crore as NPA and not to damage their future.

There are thousands of accounts like that of Bhusan Steel which are likely to be restructured in the current quarter to artificially improve the health of sick banks. It is more needed for bad bankers and less needed for bad borrowers. It is a win -win position for all concerned , if by hook or by crook, by legal or illegal methods , bad loans are considered as good assets.
Top Officials of bank:

If they declare all bad accounts as bad , there will be multiple rise in volume of bad assets, they will need to make higher provisions for bad loans, there will be lesser profit , they will need more capital and so on. As a consequence , MOF will fire them and as a result their mental peace will be disturbed, their retirement will become unpleasant and they will not get post retirement job from GOI. They will face disciplinary action or punishment for irregularities and malicious work they committed during their working in bank. As such it is good for Chiefs of Banks to opt for free restructuring of all bad loans or write them off .
Junior Officers, Credit Officers , Branch Head, Regional Head And Zonal Head:

All will get quick promotion,higher cash incentive and cream posting if they artificially , rightly or wrongly treat all assets as standard. On the contrary , if they become rigid on telling spade a spade, their survival , their family life, their career , their income, their prospect of earning bribe in cash or in kind, their image among bad customers and higher officials,their annual appraisal reports all will be adversely affected.
RBI Officials, Auditors and Vigilance Officers.:--

If auditors become rigid on treating all bad assets of banks as bad asset, they will not get job of auditing in banks in future. Auditors who do not obey orders of bank officials are blacklisted by banks as well as by business men. In this way it is direct loss to their income and attack on their family comfort and mental peace. Therefore they think it wise to give certificate of good health to even bad accounts. RBI officials and vigilance officers spend luxurious life if all accounts are good and they need not visit branch after branch and bank after bank to carry out inquiry and find out culprit or make exercise for rehabilitation of sick industry.
Ministry of Finance and Government of India. :-

They will say with proud that banks in India are safer than other countries. Media will not ask humiliating questions. Rating agencies will not create headache for them by downgrading the rating. They will not need to arrange for infusion of capital in banks if they go sick due to burden of bad loans. Politicians who looted banks for their families and friends and for vote bank will not face any action . And the most important is that GOI will more from banks by way of tax and dividend.
Industrialists and business men:-

They will get more and more loans if their existing loans are not considered bad. They will lead a luxurious life taking more and more loans, they will accumulate more and more properties in the name of their relatives. And if their loot crosses the limit , they will pray for compromise or write off of loans and thus save themselves from pain of advocates and court cases.

Businessmen like Satyam Computers know how to book artificial profit and how to present attractive balance sheet and for this purpose they are always ready to pay attractive fees to Chartered Accountants. In this way, not only they will get more loans but even auditors will earn more and more money. It is beneficial for auditors to prepare good Balance sheet for borrowers which not only earns more fees from business men but from banks also. It is just like killing two birds from one stone.

Investors, Depositors ,shareholders and all stake holders in public sector banks:

If banks book all assets or major portion of assets as standard, and show lesser volume of bad assets, banks will earn more and more profit, pay more and more dividend and price of shares of PS banks will go up and up. For this, they always need to restructure bad assets because it is not easy in India to recover loan from bad borrowers either directly or by legal course of action. As such process of restructure is a winning proposition for banks as well as for investors, shareholders, and all stake holders.

Architects, Advertisers, valuers of property who give valuation certificates for mortgageable properties to avail loans from banks of loan seekers , Advocates who legal opinion of good or bad property all get handsome fees for preparation of reports as per whims and fancies of bank officials and borrowers. If banks earn good profit rightly or wrongly, banks spend lavishly on advertising and hoardings. IN this way not only advertises earn more , even newspapers and vendors who prepare banners and hoarding get more business.

ATM , Contractors, Land Owners:

When bank earn higher profit , they will open more and more branches and more and more ATMs. Land owners and ATM manufacturers will get more and more opportunity to earn money and higher profit. Again they will give more and more costly gifts to bank officials to get higher volume of business share.

Although it is bad and equivalent to corrupt practice if bank officials sanction restructuring of loan or write off of loan or compromise settlement without valid reasons, such activities are considered as boon for all and hence there is none to question the process or doubt the integrity of any individual involved in such unhealthy acts.

Corruption does not mean only accepting or giving bribe in cash or in kind. It also means giving undue and illegal advantage to any individual by a person holding powerful post , thus misusing power investing in him or her. But the million dollar question is who will bell the cat?

When all effective persons are getting benefit due to such corrupt practices, it is in common interest for all to keep mum on such corruption And in long run such corruption become an acceptable culture in the system and the person who goes against the culture is taken to task.

In India drinking wine or consuming tobacco or pornography is considered as social crime . But Government does not ban it because it generates billions of rupees for them , job opportunities for many unemployed, Business opportunity for wine makers, tobacco makers and traders. GOI does not want to even take penal action against evil doers and law violators. This is called Indian culture.
Banks to give working capital loans to Bhushan Steel to avoid restructuring -20th March 2015

MUMBAI: With the forensic audit of Bhushan Steel revealing very little on the alleged diversion of funds, banks have decided to release working capital loans to the company to avoid any possibility of a restructuring.

 Public sector banks, which had held back working capital loans up to Rs 7,000 crore after the arrest of its promoter Neeraj Singhal by the Central Bureau of Investigation (CBI) in August 2014 for allegedly bribing Syndicate Bank chairman and managing director SK Jain to increase the credit limit, are expected to release funds. Banks have an exposure of around Rs 40,000 crore to the steel company. Singhal is now out on bail.

 "The forensic audit has not given any proof of diversion of funds," said a senior banker in the know of the development. "Banks that have not released working capital loans to the company have been asked to release funds by the consortium. The company needs funds to keep the plants operational," he said. Arun Agarwal CFO of Bhushan Power and Steel, was named as the CFO of Bhushan Steel in the FIR filed by the CBI in the bribery case," said a banker, preferring anonymity. "In the forensic audit, we did not find any connection between Agarwal and Bhushan Steel," said the banker. "It seems like a case of mistaken identity, so we have decided to release funds," he said. Fiftyone banks have an exposure to the steel company.

 "We have received a neutral report and there's no evidence on diversion of fund said another banker. Most of the public sector banks that did not have an appointed chairman were hesitant to release funds. "The joint lender forum has now taken a decision to release funds, so I am sure funds will be released," said another banker. "If all the money flows to the company, it will manage to sailBSE -0.07 % through," he added. Bhushan Steel has been under pressure to reduce its debt burden. It entered into a sale-and-leaseback arrangement ..

Bankers to hold protests at offices of loan defaulters-Hindustan Times 20th March 2015
Come April - the dawn of the new fiscal - and bankers would hit the streets to hold silent demonstrations outside the headquarters of corporate loan defaulters pressurising them to pay up their dues, said a top union official.

The bank union has decided to take on a national scale the recent silent protests by employees of Andhra Bank outside the offices of loan defaulters in Tamil Nadu.
"We are redrawing our list of corporate loan defaulters and the process is expected to be over soon. From mid-April onwards, our members will hold protests outside the offices of corporates whose loan accounts have been categorised as non-performing assets (NPA) to make them pay up their dues," CH Venkatachalam, general secretary, All India Bank Employees' Association (AIBEA) told IANS.

According to him, such a protest would spread awareness among the people of this country -- the ultimate owners of the government-owned banks -- about the huge loan dues built up by the corporates.

Last year, AIBEA released a list of 406 bank loan accounts amounting to Rs 70,300 crore that have been declared bad and had demanded declaration of wilful default a criminal offence and investigation of the nexus between the borrowers and bank officials.
Employees of Andhra Bank, cutting across cadre-lines, recently held protests outside corporate loan defaulters in Tamil Nadu.

"The moment such protests began, there were threats issued to bank staff from loan defaulters to desist from holding protests," an official of Andhra Bank told IANS preferring anonymity.

The All India Andhra Bank Award Employees Union (AIABAEU), affiliated to AIBEA, decided to hold silent protests outside the headquarters of loan defaulters.
"Ours is a silent protest outside the offices of loan defaulters. In some places, police complaints were lodged against the employees. The police, after hearing our cause and witnessing the silent protest, even encouraged us to continue," K Thamaraiselvan, deputy general secretary, AIABAEU told IANS.

According to him, the protesting employees do not hold any placards naming the defaulting corporate or their loan dues. The employees would stand outside a corporate office, holding a placard that simply says 'Pay up your dues' -- and the people can infer.
He said following the silent protests, some borrowers have started paying back their loans.
"In some cases, the debtors have paid back even Rs 18-20 lakh," he said.
The Andhra Bank employees would hold their novel campaign till March 31.
According to him, the bank earns sizeable gross profit only to provide huge sums towards NPA provisions.
In the case of Andhra Bank, the gross NPA is around Rs 7,000 crore.
It is only now that the bankers have started to hit the streets against loan defaulting corporates.

All these years, the bankers acted against individual/agriculture/student borrowers with alacrity in recovering their loan or auctioning their properties leaving the big sharks free.
"In India, farmers commit suicide for not being able to pay back their dues. In the case of corporate loan accounts, it is the bankers who are forced to 'commit suicide' for their inability to recover the loans," Thamaraiselvan said.

"The irony is that the bank deducts our loan dues from our salaries whereas they are not able to do anything with the corporate," he added.
Union officials in banks are unanimous in their view that restructuring of loans is an organised industry and needs to be probed.

A review should be made to identify the beneficiaries whose debts/loans availed in the banks with interest were written off, AIBEA had earlier demanded.
The AIBEA has also demanded that the bank loan defaulters should not be permitted to contest assembly or parliamentary elections.

According to AIBEA, floating of asset reconstruction companies (ARC) as a tool to reduce non-performing assets (NPA) should be discouraged and the NPAs should be actually recovered.

Venkatachalam is on the same page with the government's decision to revise the system of statement of intent or memorandum of understanding it signs with the bank management.
The current system is like a pyramid scheme/multi-level marketing (MLM) scheme where the large number of employees do not get performance incentives while those at the top - chairman and managing directors, executive directors - get hefty incentives. This despite banks racking up huge non-performing assets, Venkatachalam said.
Bankers also are of the view that the time has come to tabulate the incentives earned by their top officials and the total NPA generated during their tenure to bring in moral accountability.

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