Bank Finance Regulation in India
PRIORITY SECTOR LENDING
It is mandatory for banks to adhere to priority sector lending guidelines
MCLR Vs RLRR
Since the beginning of 2015 when RBI started to cut rates aggressively, RBI governors have consistently expressed disappointment at the pace of transmission. Rate cut transmission was slow because banks were still stuck on the formula of average cost of funds. As a result banks have been very slow to change the rate of lending in sync with the repo rate shifts.
Over the last five years, the RBI has been consistently cutting rates so as to reduce the cost of funds for Indian corporates and to give a boost to the index of industrial production (IIP). However, that will work only if the rate cuts are passed on substantially, if not entirely, to the borrowers. The shift to the MCLR system is designed to make the transmission quicker and seamless.
MCLR calculations
The MCLR is based on the repo rate and the deposit rates. That means, unless the deposit rates are brought down, the MCLR will not come down. Banks opine that deposit rates cannot be brought down as retail investors will then lose interest in parking funds in banks and prefer liquid funds instead. Also banking is quite competitive and no bank wants to bell the cat by reducing rates. That is perhaps one reason why MCLR continues to remain largely sticky.
Over the last five years, the RBI has been consistently cutting rates so as to reduce the cost of funds for Indian corporates and to give a boost to the index of industrial production (IIP). However, that will work only if the rate cuts are passed on substantially, if not entirely, to the borrowers. The shift to the MCLR system is designed to make the transmission quicker and seamless.
MCLR calculations
The MCLR is based on the repo rate and the deposit rates. That means, unless the deposit rates are brought down, the MCLR will not come down. Banks opine that deposit rates cannot be brought down as retail investors will then lose interest in parking funds in banks and prefer liquid funds instead. Also banking is quite competitive and no bank wants to bell the cat by reducing rates. That is perhaps one reason why MCLR continues to remain largely sticky.
RBI Directive in 2020 : Interest on bank facilities to be linked to external benchmark(RLLR) to ensure better transmission of rate cuts.
UNHEDGED FOREIGN CURRENCY EXPOSURE
Declaring defaulting borrower as wilful defualter - RBI measures for defaulting borrowers
On July 1,2014 the Reserve Bank of India (RBI) released a master circular on wilful defaulters, outlining instructions for lenders in the event of default. Bankers also explained the process of identifying and declaring borrowers as wilful defaulters, discussed below:Wilful defaulter
A borrower is classified as a wilful defaulter in any of the following events:
Identifying wilful defaulters
Bankers say there is an internal committee, normally headed by an executive director that examines cases of wilful defaults. The credit monitoring or recovery departments give their reports on borrowers deemed to have defaulted wilfully to this committee. The panel examines the efforts made by the bank to recover the dues, the repayment capacity of the borrower, end use of the funds before identifying an individual as wilful defaulter. The decision taken on classification of wilful defaulters is well documented and supported with evidence
Willful defaulters vs witch-hunt on defaultersOn July 1,2014 the Reserve Bank of India (RBI) released a master circular on wilful defaulters, outlining instructions for lenders in the event of default. Bankers also explained the process of identifying and declaring borrowers as wilful defaulters, discussed below:Wilful defaulter
A borrower is classified as a wilful defaulter in any of the following events:
· The borrower defaults despite having the capacity to repay his dues
· The borrower defaults and has not used the money for the specific purpose for which the loan was availed
· The borrower defaults, has siphoned off the funds, and the money is not available with him in form of other assets
· The borrower defaults and has disposed the assets given as security against the loan without informing lenders
Identifying wilful defaulters
Bankers say there is an internal committee, normally headed by an executive director that examines cases of wilful defaults. The credit monitoring or recovery departments give their reports on borrowers deemed to have defaulted wilfully to this committee. The panel examines the efforts made by the bank to recover the dues, the repayment capacity of the borrower, end use of the funds before identifying an individual as wilful defaulter. The decision taken on classification of wilful defaulters is well documented and supported with evidence
Declaring wilful defaulters
Once a borrower is identified as a wilful defaulter, the bank sends him/her a notice with the reasons for the same. The borrower is generally given 15 days to make a representation against the decision to the grievance redressal committee. This committee is either headed by the chairman and managing director or by the executive director who is not part of the panel on identification of wilful defaulters. The bank declares a borrower wilful defaulter if he fails to offer a proper explanation or avoids the grievance redressal committee hearing repeatedly despite notices.Penal measures
Banks are advised to send their list of wilful defaulters to RBI, Securities and Exchange Board of India (Sebi) and Credit Information Bureau India (Cibil). This is aimed at preventing wilful defaulters from accessing capital markets and borrowing from other banks and financial institutions. The penal measures include the following:
Once a borrower is identified as a wilful defaulter, the bank sends him/her a notice with the reasons for the same. The borrower is generally given 15 days to make a representation against the decision to the grievance redressal committee. This committee is either headed by the chairman and managing director or by the executive director who is not part of the panel on identification of wilful defaulters. The bank declares a borrower wilful defaulter if he fails to offer a proper explanation or avoids the grievance redressal committee hearing repeatedly despite notices.Penal measures
Banks are advised to send their list of wilful defaulters to RBI, Securities and Exchange Board of India (Sebi) and Credit Information Bureau India (Cibil). This is aimed at preventing wilful defaulters from accessing capital markets and borrowing from other banks and financial institutions. The penal measures include the following:
· No additional facilities will be granted to listed wilful defaulters by banks and financial institutions
· Promoters of companies that have been identified for siphoning of funds, misrepresentation of accounts and fraudulent transactions will be debarred from institutional finance for floating new ventures for a period of five years
· Legal process against wilful defaulters will be initiated. Lenders may initiate criminal proceedings also
· Banks will adopt a proactive approach for a change of management of the willfully defaulting borrower unit.
· Wilful defaulters will not be allowed to take up board positions in any company
Reporting to RBI, other regulators
Banks have to give the list of suit-filed accounts of wilful defaulters of Rs 25 lakh and above at the end of every quarter to a credit information company. Lenders will give a quarterly list of wilful defaulters where suits have not been filed only to RBI. Banks are advised to send the data on wilful defaulters to RBI and credit information companies at the earliest but not later than a month from the reporting date. Banks have been directed to consider all cases of wilful defaults of Rs 1 crore and above filing of suits. Lenders can also consider criminal action where instances of fraud by the defaulting borrowers have been detected. Banks need not report cases
[i] where outstanding amount due is below Rs 25 lakh and
[ii] where lenders have agreed for a compromise settlement and the borrower has fully paid the compromised amount.
Banks have to give the list of suit-filed accounts of wilful defaulters of Rs 25 lakh and above at the end of every quarter to a credit information company. Lenders will give a quarterly list of wilful defaulters where suits have not been filed only to RBI. Banks are advised to send the data on wilful defaulters to RBI and credit information companies at the earliest but not later than a month from the reporting date. Banks have been directed to consider all cases of wilful defaults of Rs 1 crore and above filing of suits. Lenders can also consider criminal action where instances of fraud by the defaulting borrowers have been detected. Banks need not report cases
[i] where outstanding amount due is below Rs 25 lakh and
[ii] where lenders have agreed for a compromise settlement and the borrower has fully paid the compromised amount.
Media reports suggest Gajendra Haldea, Principal Adviser (Infrastructure) at the Planning Commission has written a scathing letter to bankers slamming them for inadequate due diligence, reckless lending and ‘gold plating’ of sub-prime infrastructure projects. He described banks’ enthusiasm to lend to problematic projects in the power sector as ‘banana banking’.
But the latest to fire a salvo has been the banking regulator itself.
But the latest to fire a salvo has been the banking regulator itself.
First, the newly appointed Reserve Bank Governor Raghuram Rajan declared war against NPAs saying "Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise…”
And now, RBI Deputy Governor KC Chakrabarty who’s been given charge of managing the restructuring and recovery process had this to say in the central bank’s September bulletin. “For the umpteenth time, I reiterate that the reason for NPA is non-performing administration…What is really puzzling is why this affects the Public sector banks the most… In our assessment, the project appraisal and the decision making in public sector banks has been more impressionistic rather than being information based. How else does one defend the eagerness of some banks to fund power distribution companies with negative net worth!."
And now, RBI Deputy Governor KC Chakrabarty who’s been given charge of managing the restructuring and recovery process had this to say in the central bank’s September bulletin. “For the umpteenth time, I reiterate that the reason for NPA is non-performing administration…What is really puzzling is why this affects the Public sector banks the most… In our assessment, the project appraisal and the decision making in public sector banks has been more impressionistic rather than being information based. How else does one defend the eagerness of some banks to fund power distribution companies with negative net worth!."
The RBI continues to maintain that NPAs are not a systemic issue yet. But with a crackdown on reining in bad assets, it looks like neither banks nor defaulters are going have it easy any longer. The Indian Express quoting a Finance Ministry note lists out a number of stringent actions the government has advised PSBs to take to recover dues. This includes making use of debt recovery tribunals and the SARFAESI Act which empowers them to recover NPAs without court intervention.
Clearly the noose is tightening with rapid pace around both defaulters and banks. And one only hopes the momentum continues so we no longer have ‘affluent promoters with sick companies’ as the Finance Minister calls them, eating away at public money.
While public ownership of banks avoids Lehman Bros kind aggression,it may turn blind eye to other kind of issues like NPA.
Sbi orders forensic auidt on jet from 2015
SBI seems to be erring on the side of caution as it was also the largest lender for Kingfisher Airlines. SBI is unlikely to consider Jet's request for debt restructuring till EY submits the forensic audit report," said a source close to the development.
Jet Airways declined to comment. SBI said it does not comment on individual accounts or their treatment.
The airline is believed to have requested SBI for a lifeline, which entails fresh funds and conversion of a part of the existing debt to equity. Jet's debt stands at over Rs 8200 cr, and it recently declared a third straight quarter of losses of nearly Rs 1300 cr. Naresh Goyal has so far been unsuccessful in finding a white knight in Tata Sons as well as its existing 24% joint venture partner Etihad.
Jet Airways had been on the brink of collase in 2013 too, and then Naresh Goyal had brought Etihad on board and ensured cash infusion of nearly Rs 3600 cr. This time round Naresh Goyal may have no choice but sell a significant par of his 51% stake in the airline he founded nearly 25 years ago. The airline has not been able to pay salaries to nearly 15% of its workforce ie primarily pilots and senior management. It has stropped free meals for economy seats, and this week announced it would be cancelling seven routes
| Genesis of CDR Mechanism in India
There are occasions when corporates find themselves in financial difficulties because of factors beyond their control and also due to certain internal reasons. For the revival of such corporates as well as for the safety of the money lent by the banks and financial institutions, timely support through restructuring of genuine cases is called for. However, delay in agreement amongst different lending institutions often comes in the way of such endeavors. Based on the experience in countries like the UK, Thailand, Korea, Malaysia, etc. of putting in place an institutional mechanism for restructuring of corporate debt and need for a similar mechanism in India, a Corporate Debt Restructuring System was evolved and detailed guidelines were issued by Reserve bank of India on August 23, 2001 for implementation by financial institutions and banks.
The Corporate Debt Restructuring (CDR) Mechanism is a voluntary non-statutory system based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA) and the principle of approvals by super-majority of 75% creditors (by value) which makes it binding on the remaining 25% to fall in line with the majority decision.
The CDR Mechanism covers only multiple banking accounts, syndication/consortium accounts, where all banks and institutions together have an outstanding aggregate exposure of Rs.100 million and above. It covers all categories of assets in the books of member-creditors classified in terms of RBI's prudential asset classification standards. Even cases filed in Debt Recovery Tribunals/Bureau of Industrial and Financial Reconstruction/and other suit-filed cases are eligible for restructuring under CDR.
The cases of restructuring of standard and sub-standard class of assets are covered in Category-I, while cases of doubtful assets are covered under Category-II.
Reference to CDR Mechanism may be triggered by:
It may be emphasized here that, in no case, the requests of any corporate indulging in fraud or misfeasance, even in a single bank, can be considered for restructuring under CDR System. However, Core Group, after reviewing the reasons for classification of the borrower as wilful defaulter, may consider admission of exceptional cases for restructuring after satisfying itself that the borrower would be in a position to rectify the wilful default provided he is granted an opportunity under CDR mechanism.
Structure of CDR System: The edifice of the CDR Mechanism in India stands on the strength of a three-tier structure:
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Legal Basis of CDRThe legal basis to the CDR System is provided by the Debtor-Creditor Agreement (DCA) and the Inter-Creditor Agreement (ICA). All banks /financial institutions in the CDR System are required to enter into the legally binding ICA with necessary enforcement and penal provisions. The most important part of the CDR Mechanism which is the critical element of ICA is the provision that if 75% of creditors (by value) agree to a debt restructuring package, the same would be binding on the remaining creditors.
Similarly, debtors are required to execute the DCA, either at the time of reference to CDR Cell or at the time of original loan documentation (for future cases). The DCA has a legally binding 'stand still' agreement binding for 90/180 days whereby both the debtor and creditor(s) agree to 'stand still' and commit themselves not to take recourse to any legal action during the period. 'Stand Still' is necessary for enabling the CDR System to undertake the necessary debt restructuring exercise without any outside intervention, judicial or otherwise. However, the 'stand still' is applicable only to any civil action, either by the borrower or any lender against the other party, and does not cover any criminal action. Besides, the borrower needs to undertake that during the 'stand still' period the documents will stand extended for the purpose of limitation and that he would not approach any other authority for any relief and the directors of the company will not resign from the Board of Directors during the 'stand still' period. |
