CIBIL –Introduction and Importance

Credit Information Bureau (India) Limited is India’s first Credit Information Company (CIC) founded in August 2000. CIBIL collects and maintains records of an individual’s payments pertaining to loans and credit cards. These records are submitted to CIBIL by member banks and credit institutions, on a monthly basis. This information is then used to create Credit Information Reports (CIR) and credit scores which are provided to credit institutions in order to help evaluate and approve loan applications. CIBIL was created to play a critical role in India’s financial system, helping loan providers manage their business and helping consumers secure credit quicker and on better terms.

CIBIL was founded in August 2000 by Trans Union International Inc. , an international credit bureau with presence in more than 30 countries alongwith some Indian banks i.e. ICICI, SBI, HSBC, Indian Overseas Bank, Union Bank of India, Bank of India, Allahabad Bank and Bank of Baroda.

Main Object of CIBIL is to help credit grantors to gain a complete picture of the payment history of a credit applicant Credit grantors should be able to gain access to the applicant's complete credit record that may be spread over different institutions. CIBIL collects commercial and consumer credit-related data and collates such data to create and distribute credit reports to its Members which are credit institutions and banks in India. CIBIL’s over 900 strong member base includes all leading public & private sector banks, financial institutions, non-banking financial companies and housing finance companies.

The record in CIBIL is the most important factor in deciding the credibility of a borrower. Once the borrower defaults, the score gets downgraded and ultimately the name spoils to such an extent that no lender will lend willingly. The score gets reflected to all the 900 plus member lenders of CIBIL which covers almost all NBFCs, Banks and Financial Institutions.

The process to improve the credibility is quite long and it may take upto 3-12 months. Borrowers who are passing through tough time gets severe beating from CIBIL score as it closes almost all the doors to raise funds. The debarment of further credit puts the borrower into fix instead of getting any relief. The CIBIL score is the unavoidable factor for every lender. Any avoidance may lead to severe punishment to the concerned officer and hence it leaves no other option of borrowing.

Although it is an important agency and almost all lenders are dependent on this , this sole criteria for lending is also not justified. In my view, the lenders should look beyond CIBIL report considering the other factors also like security value, business potential, certainty of recovery and all.

CP

Strategic Debt Restructuring (SDR) Scheme: Overview

Friends

Recently RBI has come out with a new circular on June,8, 2015 wherein it has elaborated in detail the modes operandi of loan conversion into shares leading to management takeover . The scheme is in continuation of its’ efforts in devising framework for Revitalising Distressed Assets. The concept is based on the general principle of restructuring i.e. Shareholders bearthe first loss rather than the debt holders.

This will enable the lenders to convert the loan into equity and thereby management control from the promoters.  The scheme has been named as Strategic Debt Restructuring (SDR) scheme as it involves change in management temporarily or permanent too. The scheme is based on the presumption that the existing management is either not capable to revive the unit or does not intend to do so. Also this will give more ammunition to the lenders to pressurize the borrowers.  This scheme can also be applied to the cases where restructuring is done earlier and the MRA has necessary clause to this effect. The circular gives in detail guidelines towards conversion ratio and all related matters.

In my view, such draconian clauses needs be studied properly. An entrepreneur who has already lost all the properties, business and credibility is further pushed to corner. There may be some willful defaulters but not all are willful. In business uncertainty is always there and the entrepreneur services the obligation to the maximum possible. By threatening to takeover, there is least probability of recovery, rather the fear in borrower may further push the company to dust. Also the lender is not always at fault for NPA, even lenders are also equally responsible for such disaster. In most of the cases timely relief could have saved the borrowing unit from slipping to NPA. Always the delay in support plays major role in such situation. I also feel that the lenders should also be made equally responsible and thorough investigation should be carried out into their role and actions. Borrower should be given unbiased and patient hearing as he is the person who has taken maximum risk by pledging every thing . The takeover of shareholding and transferring to some New Promoter at later stage may be part of some conspiracy . This may also lead towards new kind of corruption. The scheme also mentions about the divestment to new promoter and also refinancing the debt to new promoter. Such refinancing may lead to some kind of conspiracy . Thus such scheme is not only impractical but full of flaws.

CP

Stressed Accounts- Settlement Process

Friends 

In continuation of my posts in relation to the stressed accounts, I wish to share my views in regard to the settlement and closure of the account . 

Once an account becomes NPA, the recovery process starts which ultimately leads to the realisation of funds . This is either done by way of auction of properties , realisation of certain assets , recovery from the guarantors and by bringing strategic investor in the company. In every situation the funds so received are adjusted against the loans outstanding . Settlement is a very important process which if not handled properly can cause lot of damages to the borrowers and the guarantors. Most of the settlements are made in parallel with the legal recovery process. Also if the settlement is not worked out properly , the amount deposited initially may be a sheer waste. Hence over commitment can be very dangerous . Also while doing settlements it must be ensured that it relieves the promoter from any future liabilities too. Value of intangible assets and business portentials should also be taken into consideration . We should be well aware about the maximum time available in settlement . 

Since the legal process of recovery can be too long , it needs to be considered that both sides get affected in delaying the settlement . 

These days ARCs are also useful for settlement and can play a fruitful role. 

CP

NPA Accounts-Way Forward

Friends

In current scenario the non performing assets are increasing day by day. As per rough estimates the NPA loans are estimated to be over 4 Lac Crore or 70 Billions. These are official figures and unofficially it can be near to 6 Lac Crores or 100 billions. More than 4 Lac industrial units have been forced to close the operation due to loan defaults . Promoters of these units are facing the legal heat and most of them would be soon finished as the legal system will also not support them much. Other side the employees and other small enterprises depending upon such units have no option but to look for alternative options. As per rough estimates more than 12 million people have faced unemployment due to NPA and loan defaults.

The moment an account is declared defaulter or NPA, all the  promoters and guarantors are branded defaulters and the names start appearing as defaulter in CIBIL lists. This results into prohibiting such promoters and their guarantors from raising any money, means doors closed to survive.

In this situation it is very important to be aware of the various options of fund raising and survival.

A. Fund raising options:

 i. There are some NBFCs and High networth individuals who can rescue the unit and lend money for short period but at higher cost. Since banks don't support, this is most common method to raise money and settle with the banks. Also there are structured funding available in the market against specific order, contacts or sales under escrow mechanism to give some breathing to the stressed unit.

ii. Sale of non core assets is another option if the lending institutions permit because most of the assets are under the charge of the lending institutions. This may help to a great extent in reviving the unit.

iii. Private equity is another major source if there is good potential in the unit.

Above options are in addition to the support of available from the existing bankers. Banks resist but if convinced can look into  revival proposal positively. Most of the revival/restructuring proposals have failed due to very impractical approach . The revival is based on more theoritical approach than practical thinking. Recently RBI has come out with Flexible restructuring scheme under which for certain segments, the loans can be restructured for 25 years too. 

B. Survival Options:

 Legal remedy is always available if there is injustice to the stressed units. If the unit is in operation, the courts take positive view and help ion revival also.

Overall, the NPA declaration is not the end, there are lot of options available if properly handled.

CP

Friends

Last week had been mostly dedicated to social engagements. I had been to Jaipur to attend two marriages one in family and other in friend circle. Both the marriages had lot of excitements and great opportunities to meet long forgotten friends and relatives . I also got an opportunity to visit Khatu Shyamji and Salasar Balaji. It was wonderful maiden visit to Salasar Balaji along with third quick trip to Khatu Shyamji.

Jaipur, being my native place, has always been close to my heart as here my long part of life was spent. Not only this, I feel it taught me a lot in all spheres of life. The visit was also significant as this gave me wonderful opportunity to meet old classmates . Some of the friends met after 30 years. But, socially this city puts me into mental pressure for various trivial reasons. Professionally I had never been satisfied in Jaipur as my initial years were spent here but it was much less than satisfaction and ultimately, I moved out of this city. Last 22 years of my habitation in Gujarat has detached me socially to a great extent and hence slightly deep dip into Jaipur culture makes me always uneasy. 

Finally Me back to Ahmedabad and trying to recoup the lost ground. Economy has started showing positive signals and we may expect better results in next 3 months with grace of  God. RBI has cut the Repo Rate by 25 Bp and hope that banks will definitely change their attitudes to help the genuine business  community.

CP