Make contracts simple to help customers, RBI official tells banks

BL :Mumbai, Oct. 4:2013

Simpler contracts will put an end to the many hidden penalties and fees in complex loans, according to Deepali Pant Joshi, Executive Director, Reserve Bank of India.

This will make everyone aware of what (loan contract) they are signing.

Banks need to apply principles of transparency to enable easier decision-making by clients, and verify assumptions about what clients understand and don’t understand about their products and the fine print in the contracts they sign.

“If you’ve ever applied for a credit card, a student loan, or a housing loan, you know the feeling of signing your name to pages of barely understandable fine print.

“What often happens as a result is that many people are caught by hidden fees and penalties, or saddled with loans they can’t afford,” said Joshi in her keynote address at the College of Agricultural Banking, Pune.

They are also hit with a massive rate increase on their credit card balances even though they have paid bills on time.

“Students who take student loans should have clear and concise information about their obligations.

“Ordinary investors — like you and me, seniors saving for retirement — should be able to receive and understand information about the costs and risks of mutual funds and other investment products so that they can make better financial decisions as to what will work for them,” said Joshi.

Information imbalance

Banks need to address the needs of the customer and customise products and services without adopting a one-size-fits-all approach, she added.

The RBI official observed that the greatest threat arises from the asymmetries information and power between financial institutions and poor consumers.

This imbalance widens as customers are often less experienced and the products they choose are more sophisticated.

This means, there is a real potential for negative outcomes arising out of institutional abuses or ill-informed client decisions.

Financial education is an important tool to address this imbalance and help consumers, she said. .

Companies rush to debt recast cell despite tighter norms

BL :K Ramkumar :Mumbai, Oct. 6: 2013

Scene worsened by slack demand, policy logjam

 

There has been no letup in the number of companies seeking debt recast with the Corporate Debt Restructuring (CDR) Cell in the July-September quarter.

Tighter norms prescribed by lenders have not deterred companies from going in for CDR, as they are unable to service their debt.

Weighing the companies down are slack demand, policy logjam coming in the way of project implementation and shortage of raw materials.

Common platform

In the reporting period, 31 companies with debt aggregating about Rs 25,000 crore were referred to the Cell, which is a common platform of the banking industry to help companies cope with their debt burden.

The big cases that have been referred to the Cell for debt recast in the July-September quarter include Lanco Infratech and Bombay Rayon Fashions, with debt amounting to about Rs 7,500 crore and Rs 4,000 crore, respectively, said a senior public sector bank official.

 In the April-June quarter, 28 companies with debt aggregating about Rs 39,500 crore were referred to the Cell. Overall, in the first six months (April-September) of the current fiscal, 59 companies (against 74 in the corresponding period last year) have been referred to the Cell with debt aggregating to about Rs 64,500 crore (Rs 39,435 crore).

 The quantum of debt referred in the April-September 2013 period is about 63.5 per cent more than in the corresponding year-ago period.

This is symptomatic of the fact that besides the ongoing economic downturn, companies are being buffeted, among others, by delays in receiving statutory approvals, forest/environment clearances, land acquisition and shortage of fuel.

 The CDR Cell was jointly floated by banks and financial institutions in 2001 to restructure the debt of viable corporate entities affected by internal and external factors.

Under CDR, creditors make concessions by reducing the interest rate, rescheduling repayments, converting debt into equity, and waiving principal/ interest (to a limited extent).  

Higher contribution

For debt restructuring to be approved by the lenders, the Cell now requires promoters to put up a higher equity contribution — either 25 per cent (15 per cent earlier) of the outstanding debt that is sought to be restructured or 2 per cent of the sacrifice (made by lenders) amount, whichever is higher.

The sacrifice amount is calculated as the difference between the interest a bank will earn under the original loan agreement and the revised (lower) interest it will earn over an extended tenure under the debt recast.

The time period for a company, whose debt restructuring has been approved by the Cell, to turn around has been cut to eight years (10 years earlier) in the case of infrastructure companies and five years (seven years) in the case of non-infrastructure companies.

 Lenders will no longer convert a portion of the loan into equity in the case of unlisted companies.

The conversion will happen only in the case of listed companies so that banks can sell the shares in future.

Viability study

A public sector bank official familiar with CDR said: “We are not allowing any CDR case to just go through. In each case, we do a techno-economic viability (TEV) study.

In each case, the monitoring institution or the lead bank appoints a consultant who carries out a TEV study before the debt restructuring package is finalised.”

He underscored the fact that since the entire promoter shareholding is pledged, banks can change the management if they wish.

What the new norms entail Higher equity contribution by promoters Shorter turnaround time (8 years for infrastructure companies and 5 for non-infrastructure companies) Lenders can no longer convert debt into equity in unlisted companies

(This article was published in the Business Line  dated October 7, 2013)

Rajan to set right defaulters, builds a info repository

ET  :5th Oct 2013

MUMBAI: RBI Governor Raghuram Rajan is leaving no stone unturned in his efforts to end promoter abuse of the benign loan restructuring regime and is soon poised to mandate all banks to stick to uniform loan classification norms.

Three people familiar with the idea said the governor, who has been meeting bank chairmen over the past two to three weeks independently and some in groups, has said lenders should share information about defaulting clients. Rajan is building a repository of information about defaulters that could help banks ensure they do not get duped by unscrupulous promoters.

"Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalise their failed ventures," he had said at his first press conference after taking charge.

The Indian banking system, especially state-run banks, is facing a continuous downgrade by ratings companies such as Standard & Poor's and Fitch because of rising bad loans and concerns that many restructured loans could turn bad.

The absence of a repository is believed to have led to some of the biggest losses to banks.Kingfisher Airlines and Deccan Chronicle Holdings, which together inflicted losses of more than Rs 11,000 crore, might have been prevented if the banks had shared information and a repository was in place.

Deccan Chronicle Holdings, which went public in 2004, took loans from several banks to expand the circulation of Deccan Chronicle newspaper in several cities and started a new business newspaper, Financial Chronicle. However, the slowdown affected the company's expansion plan and profitability.

"Nobody knew how much Deccan had borrowed from the banking system. Today, Cibil has information on all borrowers.

However, if banks share this information with RBI, it would get information on the banking system's indebtedness to companies," said Romesh Sobti, managing director and chief executive officer, IndusInd Bank Numbers compiled by the Corporate Debt Restructuring Cell shows loans worth Rs 2,29,013 crore of 401 companies have been restructured as of March 2013.
The latest RBI initiative comes after the banking system had to write off loans worth Rs 12,000 crore given to Deccan Chronicleand Kingfisher.

"The move to set up a repository is a proactive step to prevent fraud," said SK Kalra, executive director of Andhra Bank. "Secondly, this will make it difficult for borrowers to conceal from lenders the loan they have taken from other banks in case the loan is availed through multiple banking routes."

Currently, under the consortium banking route, each lender is mandated to inform all lenders about the loans on their books. However, in case of multiple banking facility, lenders are unaware of loans a borrower has availed from other banks.

Conflict between private and public sector lenders and qualification of assets are also delaying the recovery process.

"If one bank treats it as a standard asset, the company can always approach that bank for fresh funding," said a state-run banker who did not want to be identified. "In the case of Kingfisher, since the company is non-operational now, that risk is not there."


Indian banks' stressed assets rose to 9.1% of total loans (NPL ratio: 3.4% and restructured loans ratio: 5.7%) in fiscal 2013, from 6.1% a year before, says Fitch Ratings.