Adventures in Banking - II

After completing my probation (2 years), I was posted to the back of beyond of Bihar to do my rural and semi-urban assignments (3 years). On coming out from the cold, I got an extremely plum assignment at the Credit Appraisal Department at the bank’s Head Office. One of the corporate accounts which I was assigned was “B”, which was the first major credit relationship that I handled in my professional banking career and which was a major learning experience.

At the time I was assigned this relationshp (early 1990s), the banking system had an exposure of some Rs.60-70 crores to B through an informal consortium of 6-8 banks, with the bank I then worked for having the largest exposure. 

It so happened that “B’s” management had been taken over by the State Government and it was the primary agency for distributing fertilisers to small and marginal farmers in the State. Since they were bankrupt, a group of banks were coaxed (with RBI acting as midwife) to lend a sum of Rs.52 crores to purchase fertilisers for onwards sales to farmers. The money was borrowed, used to purchase fertilisers, and there the story took a completely different turn. Very little of the borrowed money in the form of sale proceeds came back to the lending banks and "B's" financial position was back to square one.

The same group of banks were again coaxed to lend another Rs.12-15 crores and the whole story was exactly repeated.

In classic credit exposure terms it was a clear Loss Asset situation. There was no collateral security of any kind tangible or intangivble say as guarantees. There were no financial statements to be analysed (historical or pro-rata future). As “B’s” books had not been audited for over 10 years) there was no way to evaluate its financial condition or prospects and there were no stock statements or any kind of data to support what happened to the primary security or the sale proceeds. In fact there were virtually no officials / management personnel of the borrowing entity with whom we could have any kind of meaningful dialogue on this matter.

In this dilemma we started writing very polite letters to the State Govt at the highest levels (Chief Secretary, Finance Secretary etc) requesting for their very kind intervention for recovering our dues. Copies of all letters were marked to the highest levels in RBI. A minimum of one to two letters used to go every quarter with minor variations in language and emphasis. It was more of an exercise in creative writing in English for me, the lowest rung in the hierarchy. This was supported by way of meetings by the Bank’s top officials with top bureaucrats in the Government and RBI. For quite some time nothing happened, and the consensus was that this was an exercise in futility. But we kept persisting with the same strategy of supplicating the State Government and RBI in the absence of any other solution.  

Slowly wheels moved and after more than a year, the State Government agreed for RBI to directly debit their account (with RBI) in installments and repay the banks. In the process we got back our entire principal along with a fairly decent amount of interest. Though the entire process took 2-3 years more. 

Credit Lesson 102: There is life beyond obtaining and analyzing financial statements, depending on security, writing detailed appraisal memos, or seeking legal action in managing credit exposures! Sustained and regular follow-up also leads to progress – it may be slow and painful. But it is effective. Maybe we were plain lucky. But it has worked for me in many other sticky accounts too!

PS: Handling Government banking business in Indian banks used to be given very low priority. This is strange, considering the size and potentiality of this kind of business. Incidentally, one of the main functions of indigenous bankers in India was to collect land revenue and transfer it to the ruler for which they were entitled to a commission on the revenue collected, that is very similar to present day government banking business. Because of which, these bankers had a very good estimate of the revenue yielding capacity of the areas for which they collected revenue and used this information for what was effectively corporate takeovers. From among the examples I am aware of, Gulab Singh borrowed Rs. 75 lakhs from Sheikh Saudagar to purchase Kashmir from the British, the Jagat Seth's of Murshidabad financed Robert Clive (reportedly 1 million pounds) for overthrowing Siraj ud Doulah and taking over the rich province of Bengal, and a group of Banaras bankers financed a small time zamindar from Jaunpur to purchase the kingdom of Banaras again from the British.      

Adventures in Banking - I

In December 2001 I moved job and city. In my new assignment, I inherited a few credit relationships (ie where the bank had given loans or advances) which were not particularly in the pink of health. Some because they were undergoing financial stress, others because of liquidity strain since they had over-borrowed. One such exposure was to “N” the flagship company of a large well-respected corporate group. It was a large well-known profitable company with sound financials. Naturally it attracted corporate bankers keen on making safe lending the way honey attracts flies.

N had a borrowing arrangement through a consortium for its working capital requirements and with all India DFIs for term debt. In addition, it had borrowed (rather it was lent) clean “corporate loans” with no clear end-use from a number of banks trying to edge into its regular banking relationship.  These loans were largely structured by way of periodical payment of interest with bullet repayment of principal. In view of the size of operations of the company or exposure, each of these corporate loans was of relatively small size and could be easily repaid out of its cash flows – provided there was no bunching of repayments.

In this way the company had raised about Rs.100 crores and had invested it in an unrelated diversification project which had some major teething problems and the expected cash generation did not happen.

Since the company’s liquidity position was very tight and there was ample evidence of diversion of funds, the working capital consortium had put in place a system whereby all sale proceeds were credited in a single account with the lead bank. Each payment from that account was monitored by the lead bank, with payments only being permitted for normal operations such as payment to suppliers, employees, taxes etc. There was little scope for paying to other financial creditors which the working capital consortium did not approve of.

Given the size of their operations and stability of cash flows servicing of these corporate loans had not been considered a major risk factor by the lending banks. I had just joined a new assignment and the branch had one such Rs.20 crores corporate loan exposure. Interest was being serviced regularly but at the time of bullet principal repayment the company requested and was given time for 30 days to repay the amount. The 30 days turned to 60 and then to 90, but the principal repayment did not materialize. Interest payment also started getting delayed and then stopped. In effect the exposure became an NPA.

Given the size and prestige of the company, taking legal recourse was temporarily deffered for two reasons. First, it would have been costly and time consuming. Second, and more importantly, this was a well-known corporate and filing suit for recovery may have brought adverse publicity to the bank in the corporate lending market. The only option left to effect recovery was to supplicate the company’s top management. Towards this I started visiting the Company’s corporate office on a regular basis to meet and request the top managers for repayment of the loan. In this course I met the CEO who directed me to the Director Finance. We had a couple of very cordial meetings where the DF explained the liquidity problems being faced by them and assured me it was a temporary issue. But the proof of the pudding is in eating it, and there were no further repayments was forthcoming.

Thereafter, the DF started avoiding meeting me and I ended up sitting long hours in his ante-chamber trying to meet him without any actual meeting. This was upsetting my other work schedules and therefore I decided to try and meet him in the evening after finishing my day’s work. This tactic was also unsuccessful and I could not get to meet him even though I sat quite late in the evening in this company’s office over several days.

Meanwhile the pressure on me to get the account regularized had become quite intense.

Now this company had a culture / practice of serving tea with a substantial snack for all employees and visitors sitting in office after 7 pm. The first day I also partook of the tea and snacks, but later felt uncomfortable of having taken it. From the next day, I politely refused it under some pretext or other. After a few days, the DF’s secretary came and requested me to take the tea and snacks. I thanked him and very politely told him that I have been coming to meet the DF and not eat. He went and informed this to the DF, who came out of his cabin and escorted me to his cabin. He then told me that my refusing the snack was embarrassing for him. I just reiterated my request for repayment of our loan.

The next day we got a cheque for the full principal dues paid out of an account which the consortium leader was not aware! We appropriated it and advised them the remaining interest dues (a very nominal amount). Within a few days the balance interest payment was also received.

Lesson 101 – There is more to loan documents, security, financial analysis, legal recourse, registration of charges etc etc for effecting recovery in NPA accounts.