HOW TO DEAL WITH BANKS – A PRIMER FOR MSMEs
Those who give you life can also take it away
If you are an MSME, the only source of credit is probably from the Banks. There are other sources of credit which are fast becoming available now. Maybe, in another 5 or 10 years, this scenario will completely change but even today if you want to be an entrepreneur and realize your dream of setting up some kind of a manufacturing unit or trading or service business, your first stop after parents, relatives and friends is on probability, the Bank. Now, going to the Bank, borrowing money, putting it into industry or whatever activity you have chosen for yourself….at every stage you face certain difficulties. The difficulties are not restricted to activities of your business. There are certain difficulties which are virtually a part of the environment and one of them – the biggest one is the problems we face in dealing with Banks. We will, as we go along, talk about what exactly happens, how things go wrong and how to deal with emerging situations. The intent is to arrive at a practical understanding of what to except from the Banks and how to deal with it.
Change your self-Image
When you approach the Banks for a loan, stop thinking of yourself as a supplicant or a person begging for money. Understand that you are a very important cog in the national wheel. This is crucial because changing your self-image is a pre-requisite for changing the way you deal with Banks.
There is a very important and fundamental difference between a loan taken by an MSME and a loan taken for personal consumption. The loan given to the MSME is not just a loan given to the entrepreneur alone or to the business entity. That particular loan plays a role in the revival of or giving a fillip to the business cycle. In fact, it gives a boost to the entire economy because an entrepreneur with a loan creates an asset. That particular asset has a quality. That quality is the generation of profit. That particular asset earns a profit, out of which the loan and the interest are repaid. Out of which, he pays the utility supplier, the transporter, the industrial development corporation of the State and the employees. Over and above that he pays large amount to the Government as indirect and direct taxes. The small chunk of money which remains at the end of all this, is what he or she can call his or her own share of profit.
You are a contributor to the National Economy – An Employment Creator
So, the financing of MSMEs has a particularly distinct role. It has distinct characteristic which are completely different from personal loans and other loans taken for one’s own personal consumptions. But the contributions of MSMEs to the national economy are now so obscured in the mechanical way the Bankers are trained and operate, that they hardly make any distinction in treatment, between financing MSMEs and financing for personal consumption.
That distinction or difference goes back to the first Industry Policy. In fact, one of the important aims of nationalization of Banks was to ensure that there was greater fund availability and focus on priority sector lending, of which MSMEs were an important component.
Actually, the founding fathers of this nation realized way back in 1956 that encouraging the growth of small scale industry is crucial for the Industrial and economic growth of India. Somewhere down the line, especially during the last 5 or 6 years, that perception which drove our Industrial Policy and gave birth to Industrial Development Corporations across India, has been lost or discarded.
Bankers today are no longer imbued with the Idealism which was part of training in the post-Independent period, particularly post-Nationalization period, when they were perceived as catalysts and agents of social change. Today bank officials are indifferent to the difference between an MSME loan account and a personal loan. So, their treatment of MSMEs is mechanical. Wait for 90 days…on the 91St day mark them as NPAs. Why even before 90 days, one starts getting calls from the Bank saying “Bharna padega” otherwise you will be marked NPA, that is Non-Performing Asset- words that hang heavily over your head like the Sword of Damocles.
How insecure are our Bankers! How much security is enough security?
There is also another important distinction between MSME loans and Personal Loans and that is with reference to the security requirement of Banks. Actually, as per Reserve Bank of India guidelines the maximum security is to be taken in respect of personal loans. Against MSME loans the Bank is not supposed to ask for 50% to 60% security against the loans.
In fact, as per RBI provisioning norms the security should be somewhere around 25 to 30%. This is a ballpark figure and not as per any specific rule. But if you read through the RBI regulations, guidelines and other literature which deals with development banking in India, the collateral security should be around 25 to 30% of the loan amount.
Let’s see what actually happens on the ground. You are creating an asset and barring the last 5 or 6 years when the price of land may have plateaued a bit, prices have always been rising across India. So, if you took a loan and gave a security of Rs. 100 in say 2004, that Rs. 100 would be more than Rs. 1000 today. So where is the need for any further security from us?
Further, the normal stipulation in the guidelines is for adequate security. No RBI guidelines or internal communications seeks 100% security. The words which are used in Banking terminology is always “adequate security”.
Now, what do we mean by adequate security?
The word adequate could mean different things to different people. That is the discretionary power which Bankers use to take the maximum security from you. So, let us look at a reasonable explanation of what constitutes adequate security. Those can be found in three RBI Guidelines which everyone should read and re-read when facing any difficulty with the Banks:
- RBI Master Circular Prudential norms of Income recognition. Asset Classification and provisioning pertaining to Advances dated 01/07/2015.
- RBI Master Circular for lending to MSME sector dated 01/07/2014.
- RBI Master Circular on willful Defaulters dated 01/07/2015.
How Bankers grab more security-Modus operandi
Let’s look at a practical situation in regard to the adequate security part.
What normally happens! An entrepreneur decides on a project or new venture. He tells himself, I need Rs. 100 for the project. I already have Rs. 25 with me. I will borrow the balance from the Banks. So, he goes ahead and makes his application to the Banks, talks to the Branch Managers and others and feels pretty assured that the loan will come through without much difficulty.
So, what does he do? He goes out and buys land for the project or assuming that he already has the land, he will apply for its conversion into Industrial land, approach the utility for electricity connection, then start applying for other regulatory clearances, say Municipal Corporation or Gram Panchayat etc. He then places orders with the Machinery suppliers.
Throughout this period, he is operating under the belief that the Bank is going to sanction the amount to him and acts accordingly. But by this time the entrepreneur has exhausted his own finances. He goes to the bank and says I need the money urgently. I have placed an order for machinery with German supplier and they will cancel the order otherwise.
At that stage the Banker tells the entrepreneur his proposal is not going through. The Regional Office, the official tells him, wants further collateral security. Being stuck in that situation the entrepreneur has absolutely no option and asks what can be done. He tells the official that he has already given him his plots, farmland etc and all that he has left is the house. The banker tells him to give a mortgage of his house and agrees to sanction the loan. In most of the cases, something like this happens.
Your house-for the Banker is gilt –edged Insurance
There is a dangerous propensity among Bankers, in the case of Industrial loans, to ask for security in the form of residential homes from an entrepreneur which should never be the case. Even if the entrepreneur is starting as a proprietor or partnership firm the last thing the Banker should be asking from him is a mortgage on his house as collateral security. But that is the first thing that the Bankers ask.
This is the mindset of the Bankers. That if the house is taken as mortgage, the chances of repayment increase, which is complete bunkum. It is not true. An entrepreneur, by nature, is never intentionally dishonest and would never want to cheat the Bank. He would never do that because he has this dream of establishing a profit-making unit. He wants to earn money from that. Cheating is the last thing that he wants to do.
So, the Banker plays an emotional card. He says “Aap to paise bharne wale ho. Kya pharak padega”. It is only a collateral security. Believe you me, very few entrepreneurs even know what a collateral security is. They think it must be on a lower pedestal than a security because the Banker is saying it is a collateral security and one’s assets are primary security.
How collateral is collateral security
In law there is absolutely no difference between primary security and collateral security.
They both stand on the same footing. So, when the Banker says Plant & Machinery is the primary security and the house is just collateral security do not fall for that. The law makes no difference between the two. When an entrepreneur faces recovery action from the Banks, the first chunk of assets to be attached and out to auction will be the residential house. The Industrial property, the land, Plant & Machinery can lie there and literally rot. What they want first is that house, that Bungalow. It’s in a good location. It is easier to sell.
They seem to get a devious pleasure from it. The loan is an Industrial loan and there are assets supporting the loan. Why not take action against those assets? Why de-house the person as the first option? After selling of the entire business, the assets, if there are still some pending dues then maybe it is justified to go after the house and recover the Bank’s money.
So, be truly reluctant to part with the house as collateral security.
The simple truth is that Bankers do not follow the guidelines given to them by the Reserve Bank of India. In effect the entrepreneur is left without any remedy.
Procrastination- The first deadly sin
It is very rarely that things happen in calamitous fashion, in business as in life. The sudden floods, the great fire, the big storm, the earthquake, are not every day events in which the unit is suddenly and catastrophically destroyed.
Everything actually happens at a slow place, like the onset of a fatal disease. Just as we ignore the 1000 warnings our body gives us that all is not well; similarly, there are ample signs and portents that the business is on a downslide and the time has come to ring the alarm bell. The entrepreneur cannot be unaware that this is happening. But he is also, almost by definition, a creature of great optimism. That, of course, is a positive quality. The negative part of that is the inability to confront issues in areas which are not to his liking, or the even more fatal disease, postponing things.
So always at the back of his mind the entrepreneur has the thought that after some time I will do this or I will do that and in the meantime the problem grows bigger and worse.
CREDIT CRUNCH –DO’S & DON’T
Whenever your Industry or your business starts facing a credit crunch the first thing you should check is whether you are the only one facing this crunch or whether similarly placed entrepreneurs are also facing the problem. Now why is that important?
It is not because of our usual Indian crab culture, to draw comfort from the fact that if my neighbor is in a problem then it is ok for me to have the problem too. Rather, if other similarly placed players are also facing a credit crunch then it is possible to unite together to have a common response and a common representation to the Banks or authorities as the case may be.
We don’t normally share our problems with our contemporaries. We think it will lower us in their esteem if they know we are going through such problems. For all you know they may be under the same constraint. Don’t do that. Talk to people similarly placed. Talk to your friends. Talk to your industries association. Bankers have ample powers under special regulations for clusters, for example. It is possible that through a united response you can have the problems of the entire cluster or industrial area rectified before it becomes an insoluble problem.
The Bank Loan Account
This is one area where a lot of entrepreneurs make the biggest mistake. What is that mistake?
If you are facing a credit crunch in your business, then you would certainly identify with this. Whenever there is unpaid interest in your CC account, you start routing your transactions through some other account. Maybe through some current account with the same Bank or a current account with the some other Bank. Because there is a fear that out of the money coming in, out of the inward remittances, some part of the money would be retained by the Bank towards interest payment. So, you route your money through a new account through a new Bank. Do not do that.
It appears to be a small thing, but this happens to be the biggest mistake an entrepreneur can make. This is a crime which the entrepreneur does, not with any evil intention. The entrepreneur is simply thinking that Rs. 5 lakhs payment has come in, Rs. 2.5 lakhs electricity bill has to be paid tomorrow otherwise the supply will be disconnected, Rs. 75000 has to be paid to the labour and some money has to be paid for crucial supplies. So, what is he to do?
For him it is a question of survival. He is simply trying to keep his unit running, in which the Bank is perceived to be an obstacle, because out of the Rs. 5 lakhs the Banker would take away Rs. 2.5 lakhs towards interest.
So, the entrepreneur thinks, let my financial condition improve and then I will start paying the Bank. Till that time the unit needs to survive. Do not do that. Why? Because by doing that you would then be ticking the criteria for branding a loan account as a Willful Defaulter. That is a weapon with the Bank with which at the right time you can be completely destroyed.
It appears to be a small harmless subterfuge. But never do it. Then what should the entrepreneur do? There are various tools available with the Banker. One of which is the “holding on operation” widely used by the Banks. In an account where the banker has launched a “holding on operation”, he will not deduct any amount. He will allow all the credits to be withdrawn say for a period of 6 months.
After the 6 months, whatever the interest was on the day the holding on operation was launched, plus all the interest and installments for the period for which the borrower is given moratorium, will be clubbed together and suitable installments would be given to the borrower.
This way, the entrepreneur is not compelled to resort to practices which can land him in bad trouble and it is, in fact the easier thing to do. But if you go to the Banker his first reaction will be to say we don’t do it. He doesn’t have to even say that because most of the entrepreneurs aren’t even aware that it can be done.
On the other hand, if you feel compelled to use devious methods to route the money, the Bank will come to you like a ton of bricks. Not when things are already very bad for you and the last thing you want, is to be labeled a willful defaulter. This will happen at a higher forum like the High Court or Supreme Court when you pour your heart out and say I created an industrial enterprise, created employment, paid large monies to the Bank, look I have done everything ….the Banker will quietly say he routed his transactions through another account…he is a willful defaulter. Finish.
Personal Account is an account different from your business
One mistake which entrepreneurs make is that they never have two distinct accounts. In other words, there is no separation of business and personal. Always have sufficient money in your personal account, especially when you are going through a credit crunch.
When you use say Rs. 5 lakhs from your personal account for a business expense, the underlying assumption is that you will replace it the minute you recoup it in the next week. The recouping never happens. The money goes into the business which has the financial digestive capacity of a hippopotamus. What goes down that yawning mouth, never comes up again.
During a credit crunch you should keep aside in your personal account 3 months or 6 months expenses of your family. Barring education you can cut down on every other extravagance where even a Rs. 25000 saved can be a life saver during a credit crunch.
Apart from your mental health, the worst sufferer during a credit crunch is your Balance Sheet. The Balance Sheet should reflect exactly what is happening on the ground.
But during a credit crunch the Balance Sheet is likely to get distorted, by you, or by your Accountant who essentially tells you that if you need more money, you have to show more sales, more profit and so on to get the ideal current ratio of Banks which is 1.33:1 otherwise he will not sanction the loan.
Do not allow your Chartered Accountant to play with your Balance Sheets.
Most borrowers do not realize that the Banker has also to operate within certain parameters which are laid down. For example, there is a Reserve Bank of India Guidelines on Fair Practices Code for Lenders, based on the concept of Lenders Liability. The Fair Practices Code based on the guidelines outlined in the paragraph 2 of the code was put in place in 2003. The Fair Practices Code, which was to be adopted by banks and financial institutions, was supposed to appear on the individual Bank’s website and given wide publicity.
You can go to the Website of your bank and check the Fair Practices Code which lays down the conditions governing the particular type of loan which you may be taking such as a personal loan or agricultural or industrial loan etc. You will be surprised to find that there are a number of things there, which are in your favour or provisions for your protection. This is a well-kept secret which Banker’s don’t normally let out. Some of the things they are duty bound to do, but they don’t because we are ignorant and don’t ask them.
In a particular case the Manager may give you an extension of 15 days or another Manager may give you a temporary overdraft and you think it is a special favour done for you because of your good relations. Actually, these may be covered under the Code. According to the Nayak Committee report 20% of your Projected Turnover would be your working capital of which the Bank is supposed to finance 80%.
You need more money to run your business. The Accountant says I’ll increase your sales by 15% / 20% so that you can get the additional finance … the enhancement which you desperately need. So, what happens is that, at that time when your business is losing money, you are not even able to understand how much you are losing because the picture presented to both yourself and the Banker is completely different from the reality. Very few businesses can come out from that state where you have started dirtying your Balance Sheet.
That business which is founded on cooked up figure is eventually going to fail… in 1 years, 5 years or 10 years. It is eventually going to fail because you yourself lose track. You also lose track of the fact that you established the unit to make profits, not to take loans from Bank. Instead of allowing your Accountant to pay with your Balance Sheet you must put your foot down and say this business can be revived. It can be revived in such and such manner. And if this exactly what is going to be reflected in the books, you will save yourself a whole lot of trouble.
Keep in mind, all of this comes in very handy, if and when you face any recovery procedure, because it is not an inflated figure of Sundry Debtors or Stock, neither of which are actually there, you may escape for 1 or 2 or 3 years. But some day when the Bank Manager or the Stock verifier or internal auditor does a check, you will immediately be labeled a fraud. All those years you spent in the business building your reputation and credibility will be at stake. For any genuine entrepreneur it makes no sense.
The March Syndrome – Stall the Banks not your Creditors
There is such a thing as the March Syndrome. From January or February, the Banker tells you March is coming, March is coming… this much amount you must deposit. He will see what your drawing power is there on 21st March and ask you to deposit the excess debit showing in your account.
You tell him you have no resources for depositing now and that you need increased limit. The Banker says 31st March you bring the account below the limit and in the first week of April we shall increase your limits. So, you tighten your belt and push all receivables into the bank account instead of paying your electricity or water bills or the supplier’s outstanding for crucial supplies.
The April 1st week enhancement never comes. For the first 15 days the Banker says we are undergoing audit. After that he will say submit unaudited figures as of March 31st to enable me to put up the proposal. It takes time to chase down your very busy CA and pin him down enough to get the unaudited figures. Finally, you submit it to the Banker by which time it is already May. Now the Banker will say pay the April interest otherwise I can’t even forward your proposal.
By this time, you are totally drained of liquidity. You have stopped payment of your suppliers, the people who would stand by you. If you want to stall making payment to somebody… stall the Bank.
NPAs and a matter of attitude
Many entrepreneurs who have risen from the middle class have a major mental block when it comes to borrowing. Having been brought up to believe that being in debt is shameful because it is associated with poverty, they never change their belief system to accept debt and even failure, as a concomitant of doing business.
It is important to remember that the Banker has not given money to you personally. He has not even given it because of the security you have provided against the loan. The Banker has lent the money to the project..to the company, after it has been appraised by their highly paid experts, If something is going wrong , it is the business which is going wrong and not you. If the unit does become an NPA there is nothing to be ashamed of so long as you are confident of your own abilities and your own business instincts. So long as you have been honest there is nothing to worry about. This matter of attitude is very important because if the business is to be revived or a new business started, nothing can happen unless the entrepreneur is gung-ho full of confidence and vigor. We do get scared when we see newspaper filled with Sarfasi Act. 2002 S. 13(2), 13(4) notices, S. 14 possession orders …. this property is under sale or that property is under sale. We see this happening every day. But there are ways to deal with that. But to be on a strong footing to deal with that you need to have done everything correctly and honestly at your end.
If you have all these things covered up, the problem would not aggravate, and even if it gets aggravated, you would be on very strong footing to deal with it.
RECOVERY PROCEEDINGS – HOW TO DEFEND YOURSELF
There is a process called Appraisal. An entrepreneur should know the significance of that process.
Your CA submits projections to the Bank. Based on those projections the Banker does an Appraisal. That appraisal includes financial viability, technical & technological viability etc. Why is the Appraisal Report Important? Because the Banker is neither giving money to you or to the assets; he is giving money to the business.
Ask and obtain a copy of the Appraisal Report. Keep that Report with you. That is a good weapon to have with you when you need to fight with the Banker. The Appraisal Report does not say that the recovery of the money would be done by selling the assets. It necessarily says that the money along with the interest would be recovered out of the “profits”.
What the Appraisal Report puts in your hand is proof of the fact that the Bank’s experts have appraised your business and agreed that, based on the projections and assumptions, the business is going to make X amount of money, out of which it can pay installments of principal and interest to the Bank.
When the business fails to live up to those projections, It is not that only you have failed. Projections by their very nature are uncertain and not only you, but even the Bank’s experts are responsible to the extent that their evaluation of the prospects was no different from your perception.
Projections do not mean that you promised that this is exactly what is going to happen. Based on certain assumptions, one of which is always capacity utilization of say, 50%, 75% and 80% in the 3rd year of the business, you project that the business is by then going to make x amount of money. If it does not happen as projected, it can equally be deemed to be the Bank’s responsibility for not having correctly appraised your capital requirement or delayed disbursement at crucial times or other similar things.
Do not, repeat, do not feel yourself solely responsible, unless you have committed fraud or siphoned off money from the business. In that case you are responsible. However, if you have put in all your efforts and it happens …there are ways to deal with that.
Please understand it’s not that the Banker can simply come, take possession of your assets and throw you out of the house and you have no mechanism to stop him. There are a lot of things which are in your hands, For that very reason the Appraisal Report is very important. Because when you are going to stand against the Banker you should know what assumptions they have approved. , Whatever those assumptions are there on the ground or not. If they are not, what are the assumptions in which there are serious variations, capacity utilization, sales etc. And you can demand the Banker to assist you in realizing those assumptions. The Banker is “Duty Bound” to cater to your needs within the regulatory frameworks.
What comes first? Business survival or repaying the Bank?
Take the example of a dehydration unit. The unit made around 500 tons of dehydrated onion. The manufacturing cost was around Rs. 60 to Rs. 65 per kilo. The market price was around Rs. 80 to Rs. 85 per kg. Then demonetization happened. Almost overnight the market price crashed to Rs. 40/42. What can that entrepreneur do?
The Banker like all Bankers started puting that entrepreneur under pressure…pay the money, pay the interest, pay the installments. The entrepreneur figures if he sells material costing Rs.65 at Rs. 42 and pays interest to the Bank on top of that there is no way he can survive. The Banker says the unit will be declared NPA.
Left with no option he sells 200 tons of dehydrated onion flakes in February and March after the demonetization. He is forced to sell because his house is mortgaged. Taking possession of the house etc comes at a very late stage. Even if his name is published in the newspapers..even if a Notice is pasted on the wall of his unit it is a great shame. People have been know to commit suicide because of such things. That is because the entrepreneur thinks the default, as his default. Let us be clear, the default is not your default. The default is of the business. You will be guilty if you have siphoned off the money. If you have not done that nobody can throw you out of your business. No banker, no law, will be able to throw you out of business. There are ways, there are mechanisms which can be activated, forum available where you can agitate your issue and get things done.
Coming back to the dehydration business, March has come and gone. In September, there is again the clamor of being declared NPA. The limit is enhanced by Rs.20Lakhs just to cover the expenses and repayments so that the account is not declared NPA. In December, he makes huge losses. In addition, the burden has been increased by the amount which could have remained unpaid. We should know that if you make the payment of the outstanding amount even 5 years after the day it is marked as NPA, the accumulated interest over the period, in 99% of the cases, is waived off.
So, it doesn’t make much sense to succumb to the threats of the Banker, by borrowing more to repay him while not paying others who could have helped your business come out of its difficulties. If your business is making profits pay to the Banker. If not, assure him that you will pay as soon as you set things right with the business. That is the only way the entrepreneur can survive the way things stand. But to take that position you have to be completely honest and you should not have misused the money in any manner.
Recovery by Financial Institutions – RDDBFI Act & SARFAESI Act
Earlier the Banks used to go to the Court and file a suit for recovery. The Courts were overburdened with large numbers of regular cases due to which Courts could not accord priority to recovery matters of the bank and financial institutions. So, the Government came up with the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.
Through, the RDDBFI Act quasi-judicial authorities were constituted, and the procedure was specified for the speedy recovery of debt. Presently there are thirty- three Debt Recovery Tribunals and five Debts recovery Appellate Tribunals across the country.
The problem faced due to clogging of the Courts let to formation of the DRTs and DRATs under the RDDBFI which is even more clogged than the Courts. This prompted the enactment of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002 under which borrowers, Guarantors, and any other person aggrieved by any action of the
Bank can approach the Debts Recovery Tribunal (DRT). There are two pre-conditions when the Banker can initiate recovery under the SARFAESI Act.
The first one is that the account has to be marked as NPA. Now marking of the account as NPA is a completely misunderstood concept. Many Bankers do not understand what exactly it means. They take it to mean the 90 days from default of an account is NPA without taking into consideration the detailed guidelines which are given by RBI on this subject. They do it mechanically and nonchalantly, without application of mind. Even the entrepreneurs are not aware about this. They think that 90 days norm after default is inflexible. No, it is not.
And the second aspect is that the Bank must have a secured interest in your asset. These are two ground rules which entitle the Bankers to take recourse to the provisions of the Act for recovery. Now whether the Banker has a secured interest in your assets or not, is a legal question. Again, while the banker feels he has a secured interest, you will be surprised to know that the borrower is equally convinced, since he has given mortgage to the Banks. But when one examines the legality of those documents one finds that in many instances, the documents are not tenable and create no “secured interest” in favor of the Banks. So, examination of the documents which you have executed while availing the loan is very important.
Good documentation is key to a good defense
A few things are to be kept in mind. First, ensure that you have a copy of the Appraisal Report of the Bank in your record. Secondly, take copies of all the documents which you are executing. Keep these in a file. Even if you are not facing recovery action have those documents in your file. Whenever you get time, read through and understand the implications of those documents… whether those document create any kind of secured interest in favor of the banks or not. Just because it is printed on a stamped paper or you have gone to the Registrar’s office, executed and signed it doesn’t mean that that document is legal and tenable.
Many bankers take signatures on blank document. But remember, such a defense must be incorporated in your pleadings and established in Court. The implication is serious. It means you cannot be bound by such document. However, a mere reference to it in passing in the Court will hardly have any impact whatsoever and will be laughed out of Court.
Then there are the standard routine defense pleas. Signature were taken on blank documents, assets are not there, we are facing difficulties, give us some time etc. Just as the accountants want to match the ideal financial ratio which they know the Bank is looking for during Loan Appraisal, similarly the lawyers have some 4/5 standard grounds, without reference to the actual facts which make your case unique, exceptional or make it deserving of being treated differently by the Tribunal or the Court.
The point is you are an entrepreneur, a valued, productive contributor to society. There may be 100 facts about you, your enterprise and your product which are unique and can create a favorable impression upon the Court. So, While dealing with the Banks or the Tribunal or the Courts you need to concentrate on those fundamentals which make you different, in fact, so different that there are literally 100’s of beneficial legislations for MSMEs, which unfortunately nobody cares about and which nobody invokes.
Can you put the boot on the other foot? Counter-claim!
How do you take on the Banks in the case of recovery proceedings? Like most challenges in life the preparation should have been completed a long time before the crisis.
The Bank has issued you a Notice claiming that X amount is to be recovered from you. One gambit is to counter-attack and respond by saying that the Bank owes you 2x or 5x or 10x. That is the only way to deal with the Banks and no other than MSME can do this. Why?
Let’s look at the whole process. First is the Loan Appraisal Report. Then comes your sanction letter. Over the period of your dealing with the Bank, correspond and communicate continuously with the bank. For example, there could be an email to the Bank stating that your electricity connection will be cut if the bank doesn’t permit an overdrawing of Rs. 2 lakhs urgently. Then a copy of the utility record of disconnection. Add the email you sent recording his refusal and the consequent disconnection. You can put him to the cost of that. Every digression from the norms, every dereliction of duty by the Banker can be converted into a claim for damages which could be many numbers of times of that which the Banks claims. Each non reply or disregard of the Bank of your correspondence makes your case better and the Bank’s case worse.
Assume that the bank has started recovery proceedings for Rs. X as due from you. The threat is to throw you out, to dispossess you of your assets, to take physical possession of your factory etc. Then you go to the Debt Recovery Tribunal (DRT) and say this Banker owes me Rs. 5X. Either ask him to pay that or hold his hand.
Are you wondering how you can do this? You can do this, provided you have intelligently placed things on record, had regular communication, dealt with the Bank correctly, have not allowed others to changes your Balance Sheet and if you have not diverted funds. Then you can stand up against them.
This is true under any law. For example, in the case of Co-operative Banks, recovery is initiated and a Recovery Certificate is issued u/s 101 of the Maharashtra Co-operative Societies Act, 1960 by the Dy. Registrar of Co-operative Societies. This is also done as a matter of routine. The Banker files a claim under S.101. After a few hearings the Registrar will ask how much time it will take? How many days… and then proceed to issue Certificate u/s.
This is an example from just 3 months back. A counter claim was raised before the Dy. Registrar, Thane. It started out with questions like, what is this? Where is the provision? How can this be done? The counter was to say, show us what prevents us from filing this and what prevents you from adjudicating it. Though 3 months have elapsed since the final hearing , the S. 101 Certificate is not yet issued.
This is possible, of course, only when the client is ready to fight it out up to the highest Court because you need to go through each stage. Any MSME can take recourse to a counter claim for which you need to create and maintain proper records which can prove your point to any authority before which you appear.
Duty of Care
The moment you sense a problem, put it in writing irrespective of whether the Bank Official does or does not act on your communication. Writing to the Bank continuously is most important. That is what gives rise to his duty of care. We don’t have this concept. If you see western jurisprudence the duty of care is such a concept which has evolved to a great extent. Here we don’t even know about it. The action or inaction of the official and your entitlement to be compensated or at the very least prevented from being labeled a willful defaulter arises directly from such communications.
Ignoring a Notice will not make it go away
The Bank issues the first Notice under Sec. 13 (2) of the SARFAESI Act calling on you to pay Rs. X amount in 60 days. That’s the first Notice which comes. That’s the Notice which everyone ignores. Why do they ignore? Because the notice does not really say anything threatening, other than to pay the amount, failing which the Bank will take recourse to the SARFAESI provisions.
Actually, that notice should trigger your defence against the allegations of the Bank. There is provision for a reply and representation under s 13(3) (a) for which you should take up all the grounds in your reply. You don’t need a lawyer at this stage. You can write it to the Bank yourself or you can take the help of a lawyer.
Make a detailed representation why the banker is not eligible to recover money from you or why the initiation of recovery proceedings is not on the threshold of reasonableness and fairness. At this point one does not have to worry about the legal provisions. The Banker is bound to reply to you within 15 days. Normally that reply is a mere denial. We don’t agree, we don’t accept, that is wrong etc.
In the entire Scheme of the SARFAESI Act, that is the first time when the borrower is heard. There is no forum prior to that because the Bank has unilaterally marked your account as NPA. The Bank has unilaterally made a decision to initiate a recovery without hearing you. Actually, that is the first point where you should get a proper hearing. But that does not happen.
Taking possession of the property
But your representation will stand you in good stead when the matter escalates and help you to stall the Bank in its tracks. The Bank will issue you a 13(4) Notice. What happens is important. A Notice of Possession u/s 13(4) is issued to you, stuck up on the Property as well, and is also published in the newspaper. It can also happen that a Bank will take the help of Recovery Agents from Security Agencies who are goonda-type people. They come with the Bankers. They manage the Police Stations and the revenue Authorities. They come and they take physical possession of the assets. Actually, you are not bound to give possession to them based on the 13(4) Notice.
Possession under the Scheme of the SARFAESI Act, if the Bank wants to take physical possession of the property has to come after the order u/s14 of the District collector or the Chief Metropolitan Magistrate in case of Mumbai. It is only on the basis of that order, that possession can be taken. But a lot of Bank’s resort to rough tactics. They obtain the Order from the Collector. Within 2 to 3 days they come along with the order, policeman and the village Talati or the Circle Officer to take possession. Even at that stage you are not bound to give possession.
Notice for Possession
There has to be a prior Notice that on so and so date at so and so time we will come and take physical possession. If that Notice is not given by them, you have the right to prevent their entry into the premises. It would be sensible to video-record whatever is happening.
In such circumstances, when you are standing up against a Banker when he is doing something illegal, all care should be taken. The security agencies who have been given the contract to take possession operate on a commission and therefore, have every incentive to trample on the law and procedure which is meant to safeguard you. The better the quality of evidence you have when they do this, including independent witnesses to such infringements, the better it will be for you when the matter moves to the Tribunal or Courts.
Barring actions clearly and provably done in self-defense, do not take the law into your hand. You can ask them politely to show you Order u/s 14. If it’s not there you can bar their entry or get them to leave. Actually, the moment you ask for the Notice they will understand that they are dealing with someone who knows the law and procedure and retreat.
Insolvency and Bankruptcy Code, 2016
We started out by saying that there is a difference between the entrepreneur as a person and the business he runs. Normally, our self identification with the business is strong. But in the interest of our sanity, well-being and as permitted by the law we must try to maintain the distinction.
A bit of advice is, not to persist beyond reason, if the Business Continues making losses year after year. It is also important to know when to quit. That decision is critical and should be taken with the head, not the heart. Otherwise you will keep pouring money inside it and maybe never be able to recover.
Earlier we had no mechanism but now have a mechanism under Insolvency and Bankruptcy Code, 2016.
It’s not only the Banker or the Creditor who can file for Bankruptcy. You can also file for Bankruptcy u/s 10 when you have realized that it’s time to cut your losses and maybe get into something new. You can then go to the National Company Law Tribunal (NCLT) and say this is the company Balance Sheet, these are the loans and the company is unable to pay the loans.
Under the code of IBC, the process in brief is that the Insolvency Resolution Professional (IRP) would list all the assets and all the liabilities and then he would call for offers for that particular company. If the company can be revived, somebody else will come and revive the business. You would be completely left out of that set-up. Or may be the new buyer or business would want your expertise in it. The law is evolving right now. Few months back Economic Times carried a news item that the Government is thinking of relaxing the provisions of the owners taking over their own company under IBC. So, if something like that happens, your company which you put under the grinder of the IBC…will come out, neat and clean. Which you can possibly again own and start generating profits. If at all it materializes, that is an option you should examine.
Insolvency and Bankruptcy Code is still evolving. The law is very fresh and some successful resolutions have happened in the case of MSMEs. A number of companies which would have been sold off as junk have again been re-started.
Finally remember that it is not always you who has failed, it is the business which has failed. Sometime that is part of a natural business cycle. The strength to fight the battle will only come if you have been completely honest. It is actually a new journey, where you may get a chance to cut the flab of the business and rejuvenate it. It may just be the start of a great new success!
Author: Manoj Harit
Manoj Harit is a lawyer practicing at the Bombay High Court and is a specialist in helping business deal with various recovery actions of Banks.
As published by Ministry of MSME, Government of India on 13th February, 2019 on pib.nic.in The Cabinet Committee on Economic Affairs, chaire...
National Small Industries Corporation (NSIC), is a Government of India Enterprise under Ministry of Micro, Small and Medium Enterprises (MSM...