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Friday, Dec 13, 2002

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Money & Banking - Non-Performing Assets

RBI asks lenders to take ownership rights of defaulting corporates

C.R. Sukumar


THE Reserve Bank of India (RBI) has advised banks and financial institutions, as a part of better management of non-performing assets (NPAs), to retain ownership rights over the errant corporate entities by way of getting control over the shareholdings of promoters.

In a recent communiqué to lenders, the banking regulator said the lenders should retain the right to exercise control over the ownership/management, while considering a plan for the revival and rehabilitation of companies.

According to the RBI, "This can be done by ensuring pledge of promoter's shareholding to the lenders with a right to change ownership if certain covenants/stipulations are not met."

Issuing new guidelines on preventing slippage of NPA accounts, the regulator advised the lenders to initiate legal action against their clients once they were convinced that rehabilitation was not possible and there was no other way out.

"This will put pressure on the borrowers and will reduce the chances of depletion in the value of the security," the RBI said, while stating that the new Securitisation Ordinance confers substantial powers to banks and FIs "to take over the management of business of the defaulting borrowers."

While advising the banks and FIs to take recourse to criminal proceedings against borrowers where misleading information was furnished influencing the credit decision, the banking regulator suggested the lenders to ask borrowers to declare on oath their borrowings, assets and all other material facts, "which can be the basis for criminal action in future, if details are not found to be correct."

The RBI has also advised the banks and FIs not to hesitate lodging formal complaint against the auditors of the borrowers with the Institute of Chartered Accountants of India (ICAI) in case of falsification of accounts on the part of the borrowers where it was observed that the auditors were negligent or deficient in conducting the audit.

Aimed at identifying the genuineness of the borrowers in reviving their units, the banks and FIs were advised to consider conducting special investigative audit of all financial transactions, business transactions and books of accounts of corporates.

Asking the lenders to provide additional finance to ailing units only after examining the quality of management, the RBI advised the banks and FIs to appoint consultant to conduct a proper techno-economic viability study. In the case of totally unviable units, the lenders were advised to immediately initiate action against the borrowers under the newly promulgated Securitisation Ordinance without any loss of time.

The regulator said the lenders were "strongly encouraged to take immediate recourse to this legal remedy where they encounter malfeasance on the part of the promoters/borrowers."

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