The recent arrest of a former chairman of the bank points to attempts to hijack the recovery and resolution process
NS The arrest of former State Bank of India (SBI) chairman, Pratip Choudhary on October 31, 2021 One case – which was related to a hotel project in Rajasthan’s Jaisalmer, which was financed by a bank – became the center of attention, but reactions were mixed. There are some who consider the arrest of any banker without any reason as meritorious. Such harsh reactions are often evoked by ‘wiki-pundits’. One such person wrote: “… was arrested … for selling a company as property (sic) and he joined the same company after retirement.”
background
The group, which runs the Garhrajwada, a luxury hotel in Jaisalmer, took a loan of ₹24 crore and a cash loan of ₹1 crore from SBI in 2007. Due to non-payment and the global financial crisis, the bank restructured the account. 2009. It became a non-performing asset in June 2010. The bank took back the loan. On non-payment, it approached the Debt Recovery Tribunal (DRT) in 2013 for ₹39.69 crore. It also proceeded under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act. To secure its financial interest, the bank entrusted a loan of ₹25 crore to Alchemist Asset Reconstruction Company (AARC).
The AARC took the matter forward in the DRT and under the SARFAESI Act. It also approached the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC). It had to move the National Company Law Appellate Tribunal (NCLAT) and the Supreme Court of India before the case was admitted by the NCLT in March 2017. The promoters’ protracted strategy, which includes not handing over the company’s vehicles to the Interim Resolution Professional (IRP). , the process got delayed. NCLAT and court took strict action on these. The promoters also filed a First Information Report against the IRP which resulted in his arrest. The court quashed these proceedings.
In December 2017, the NCLT allowed the hotel to be sold to JFC Finance, despite attempts by the promoters to delay things on frivolous grounds. The lenders were paid in full, while the promoters received only ₹1 per share, or ₹17.4 lakh. This was the first such sale after IBC barred promoters from bidding for their assets.
recovery yield
The bank recovered ₹25 crore out of arrears of ₹40 crore. A recovery of more than 60% is excellent when globally, such sales are only 30% or less. In India, the average recovery across channels is only 23.2%. It is highest at 45.5% of the amount covered through IBC. The recovery from the SARFAESI route has gone up to 26.7%. Lok Adalats and DRTs come with 6.2% and 4.1% respectively.
Since the underlying security was sold by the ARC, the consideration received by the bank while assigning its dues and its suitability in relation to the security value is irrelevant. This sale is not related to the value of the underlying security. Thus, a transparent process was followed for the sale of receivables by the bank, and for sale by the arc to the final buyer.
Therefore, there was no case of malice against any of the bankers including Mr. Chaudhary. He took over as the chairman of SBI in September 2013, about six months before the bank sold the assets to ARC in March 2014. He joined the board of ARC six months later in October 2014. In any case, such individual cases do not occur. Come to the chairman of the bank with the status of SBI
NS The rationale behind accepting a smaller amount in settlement is based on a banker’s decision that recovery of Rs 25 crore today is better than recovery of an uncertain amount in the distant future, given the time value of money and the delay in our judicial processes. The second reason is that banks are in the business of banking, and recovery is not their specialty. Investing people and money in poor recovery processes – through specialized branches or otherwise – distracts a bank from its core business.
Mr. Choudhury’s arrest came in a related case where the same borrower alleged fraud in an apparent act of retaliation. The case was initially dismissed for lack of criminality. The case was later revived and a non-bailable warrant was issued. The arrest of Mr. Choudhary and the arrest of the other directors does not indicate that he was either not informed or defended properly; Or he was a victim of overconfidence.
an instability
This episode reflects a lack of understanding of the recovery process and its underlying principles. These could have been clarified during the discussion. There was no sign of any attempt to coerce the system through blackmail to achieve the desired result.
The balance of power between the lender and the borrower has moved like a pendulum. Time to time, the government and the Reserve Bank of India (RBI) have gone ahead to strengthen the hands of the lender. face to face borrower, and vice versa. But, a volatile balance was often restored with the system, with bankers and other gatekeepers involved, conspiring to turn the system back in favor of the borrower.
In 1962, after the failure of the Palai Central Bank, an amended RBI Act provided for Actually Credit Information Bureau, which would have been the first in the world. The thing that strengthened the exchange of information between bankers soon became useless. A decade later, in 1971, a study group recommended the establishment of a Credit Information Trust. The entire system was discontinued in 1995.
The credit authorization scheme, inventory norms and other regulations were introduced from the late 1960s with similar pious intentions. But, an industry of professionals emerged to train and advise borrowers on how to generate statistics to achieve the level of credit they seek. The Debt Recovery Tribunal was introduced in 1993 following the recommendations of the Narasimham Committee of 1991. Almost a decade later, the SARFAESI Act was passed. These were aimed at expediting recovery and strengthening the hands of bankers. But, the system, over the years, got compromised in different ways. This included non-appointment of judges, unsuccessful auctions, delayed payments, etc. IBP is by far the most effective mechanism to secure the interest of the lender. Mr. Chowdhary’s arrest is an early sign of attempts to hijack the system. A cautious government and regulator should move swiftly to bridge the gap. Those who hold high-level fiduciary responsibilities should also decide who they associate with later. Very often they are not after persons or their value, but after their final designation.
Yes. Sreekumar is a former central banker
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