NPA Feature: Excess Non-Productive Investments

Friends

While we continue to advise the clients who are in trouble and passing through serious stress , there are certain common features, noticed by us, which lead to stress. Although most of them are mentioned in my earlier posts, still wish to share my views on one more common reason of stress. It is most commonly noticed that the Balance Sheet or may be off Balance Sheet , disproportionate investment is made in to non productive fixed assets (i.e. Land and Buildings mainly)which are nowhere related to the Business and sole motive is to encash the valuation at later date. It is human nature to invest in real estate but excess investment  made out of the business funds can be disastrous . Such investment is done only for future valuation without any other logic. Though these investments look quite good but they take away the business funds and can not be termed as intelligent investment. These investments should be made only from the surplus own funds.

Once these non core investments are made the working capital dries out and thus path of stress is begins. Liquidity crunch wipes out profitability and account becomes irregular. In fact any undesirable investment can be dangerous. Liquidity has to be maintained in any case irrespective to the opportunities available to avail higher valuation. Lenders need to look into such issues seriously as this can be the beginning of dark days ahead. However some times lenders promote such investment as this increases asset coverage but the loss is much higher than the security.

We noticed that higher the undesirable investment , sooner the stress. Such investments made for safeguarding the future of the business is in fact poison for the enterprise. It should be avoided in any case specially if made from the borrowed funds.

CP

Stressed Accounts: Role of Promoters’ Family

Friends

When going is good , everything looks good. The society, Relatives, Friends, Peers, Employees and Colleagues give lot of respect and applause. Everything goes so smooth and fast that it is impossible to imagine about the possible tough time. As called quite often ‘the Charity and challenges begin from home’, exactly same thing happens in business too when the turbulent time starts. Our own people start  doubting the capabilities and even the past achievements. The promoters gradually get replaced by new set of people who are not very positive. Everything is doubted and non communication becomes the most popular tool. Generally it is experienced that the doubts on the capabilities of the promoters lead to fear and hence the situation starts deteriorated day by day. The Bankers ask certain information, Data and explanation which are perceived to be potential threat for the borrower , who , out of fear , either avoids or gives wrong information. The cascading effects of one misinformation is so much that very soon both borrower and lender who are basically partners part ways and start taking actions which is in their short term interest. No one is concerned about the unit, its’ employees and other stake holders. The situation becomes so worse that the unit which was bread & Butter for all becomes a liability and planning starts for getting rid of that poor sick unit.

Family members of the promoter are one of the key stake holders and hence their role is very important in deciding the fate of the stressed units. It is very easy to discard an ailing unit which is not generating any more revenues but to revive, a lot of guts and hard decisions needed. An ailing unit , if treated as family member by the promoter, has great potential to revive. In general, it is noticed that the wealth generated by the unit which is not doing well now, has only one way. Neither promoter nor his family would ever return back ,even a very small part of such wealth, to revive the unit. No one would ever part with the luxury for a short period and that is the basic reason in lot many NPA cases. If the promoters’ family alongwith other stake holders put complete faith in the troubled entrepreneur, the probability of revival is very high. There is no system to involve the family members in ailing unit as the communication is always in legal language by the lenders and hence nothing revives.

Although mistakes are bound to happen but  Nobody is going to repeat the same mistakes next time if chance given. Business has uncertainty as its’ basic character but that given fun too.

In my view, the recovery process should be avoided to the maximum possible and the lenders should start communicating with other stake holders. If proactively handled, the unit has some probability of revival. Family members if ascertained properly can play a very important role in coming out of the tough situation. A promoter with established track of entrepreneurship can definitely bounce back if chance given and intentions are good.

Please don’t mistake me that all the promoters have good intentions. 

CP

Stressed Accounts: Challenges in Restructuring/Revival

Friends

Once an account enters into stressed by way of SMA0, SMA 1 & SMA 2 and then doubtful, substandard and Loss account, the journey is too short and it is like a milking cow getting old and useless . The situation and condition for that matter worsens too fast. It does not take more than 9-12 months before account totally branded as NPA.

A stressed account needs immediate attention and lot of care to handle otherwise and mostly it ends as a loss account with no hope to revive. After some legal battles, the units goes in the hands of typical businessman who deals in scraps. It is really quite painful to see a unit being grounded which till very recently was centre of activities.

There are few options left once the account is in stress depending upon the business potential, asset value, promoters’ confidence in the business and lenders’ trust in the promoters. While disposal of the unit is quite easy and there are many agencies who are expert in that, few cases are revived with lot of efforts. Revival or Restructuring is quite common at the first stage in our Indian banking system but this is not without hurdles and challenges. Let me share my views on these challenges, which you may have also experienced:

1.       Acceptance of Revival /Restructuring Plan: In most of the cases first draft of revival plans  is always rejected by the bankers/lenders.   Lenders take lot of time 3-6 months to give patient hearing to revival plans unless there is some time constraint. The revival plans also get delayed due to impractical approach of the lenders and the borrowers both. Lenders often don’t look at the plan with practical approach , rather they are more concerned with the set banking norms which have already failed in such cases. Borrowers too feel that this is one more opportunity to screw the banks further and demand as much as possible from lenders.  By the time both sides come to the reconciling stage it is delayed by 6-9 months. This delay causes highest damage to the bleeding borrower.

2.       Infusion of Funds by Lenders and the Borrower: Once the revival plan is accepted, the commitments of additional funding made by both the sides  become one more challenge. Borrowers find it too difficult by this time bring in additional funds in the business which is either not there or stuck up somewhere. Lenders too take long time in convincing themselves to infuse funds. In many cases , it is noticed that such addition commitments  by the lenders never come in the business and it is adjusted against interest and other dues already outstanding or to be due in near future. To keep their record clear the lenders defer such infusion .

3.       Valuation and Viability:  Although the valuation of asset is always done by the empanelled valuers, it is quite commonly noticed that valuation at the time of borrowing is much higher as compared to the valuation while restructuring the loan. It is beyond my understanding why the lenders don’t get the three type valuation (Market value, realizable value and distress value) while lending. Why it should be made compulsory that the lending should be done considering the distress value as one of the factor. Further another key issue is the viability of the unit for revival. This is also done by the empanelled agencies but the studies are not carried out properly. The delay and misconception can lead to wrong decision.

4.       Over commitment by the Borrower: Biggest  challenge in the revival is the over commitment by the borrower who is more interested to buy time . Very few cases have seen the timely fulfillment of commitments by the borrower made in revival.

In my view, both the lenders and borrowers try to pass on the bucks and buy time so   the problem is passed on to some more months. If proper revival plans are prepared with honest intentions, there will be great possibility of revival. Also the timely decision by the lenders can help the stressed account to revive. In last one year RBI has come out with two major schemes i.e. 5/25 and SDR. It is working on some more steps to handle the situation of stress accounts but success will be only when both sides understand the situation properly and timely. RBI should consider the views of the entrepreneurs without blaming only to them, similarly lenders should also improve their accountability system and make good use of the tools available with them to handle stressed accounts.  Sometimes a cow can be ill which does not mean it can’t be cured. Lenders are major financial partners and have all authority over the borrower but this brings lot of responsibility on them.

Friends, I never intend to side the willful defaulters or fraudsters but believe that sometimes lenders are party to such defaults and hence to some extent responsible for such situation.

CP

Non Performing / Stressed Accounts: Role of Consultants

Friends

When an account is high rated and well performing, there are many options and opportunities to the unit and the promoters. The money flows in and there is always a que of investors. New Bankers source various ways and means to take exposure in the account and existing bankers not only try to resist the entry of new lenders but also use every ways and means to increase the exposure.  Even the existing consultants use every trick to oust the new consultants and create a mystery curtain around the promoter  to safeguard their existence.  The money is sourced easily and that is one of the key factor for turning account into stress at a later stage. Promoters start adventuring beyond their capacity and without much analysis. A single wrong business decision spoils the party. This golden situation gradually fades away and the account enters into stress zone. Soon it turns into NPA and then new journey starts.

The consultants and advisors who served such clients in good time are generally not very supportive at this stage. I wish to share my views on the Role of Finance Consultants in case of stressed accounts.  The expertise and experience of handling stressed accounts is not very common. Very few Finance consultants enter into such advisory services. The consultant has to associate with such accounts for quite long time as it takes 12-24 months time to resolve such accounts. There are legal, financial and technical issues which hound the units badly. Hence strategy to handle situation is key of the game. Most of the events go unnoticed and the performance of the consultants can not be visualized due to long drawn process. Other side the fee realization is also quite challenging due to stress in the unit. Thus it needs lot of patience to handle such accounts. Unlike the consultancy in sourcing of finance , this advisory of handling stress cases does not bring substantial funding. Only achievement is handling the lenders, working out  of strategy to survive and move forward .

The general perception is that consultant is needed to raise finance whereas the fact is that the advisory services are of utmost importance during the crises or stress for that matter. Any step without proper advice may be disastrous for the unit. It is just like we need better doctor or even surgeon when the disease is more crucial. I fail to understand why the promoters of stress units do not think in this direction. To worse the matter, it is noticed that the management of such units become more knowledgeable in the matters of handling  legal and financials. 

CP

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