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.