first letter to the Banking Ombudsman

We approached Federal Bank Limited with a confirmed
letter of credit for US $ 57,400 on hand on
08/03/1996 and by 15/03/1996 vide sanction order
no.30374 a temporary , one time Packing credit Limit
of Rs.15 Lakhs as PCL and Rs.20 Lakhs as FDBP were
sanctioned we had offered a collateral security of
1020 sq.ft. of building in the central commercial
area of Erode and completed all documentation
formalities. The formalities of confirming the
temporary limit as permanent extended till
midmay’1996 whoever error in interpretation after
size and area, of the collateral offered which was
1020 sq.ft., originally mentioned by the branch as
1000 sq.ft., but the legal department at regional
office found the reason to consider 159 sq.ft. out of
1020 sq.ft. to have an insufficient property
description. We presented a clarification relating to
the description of our property vide our letter to
branch dt.15/05/1996. It was also represented in the
same letter that the property offered was several
times as valuable as the value taken by the branch
manager and it was requested that a grade IV officer
may be deputed to value the property after a site
inspection. By this time orders on hand and orders on
hand and orders under negotiation increased, so the
company requested enhancement of PCL to Rs.45 lakhs
alongwith proposals for an adhoc term loan of 6.89
lakhs for a tailoring unit which was not entertained.
To convert the temporary limit of Rs.15 Lakhs to a
permanent limit, we had to offer an additional
property of 6000 sq.ft, which was conservatively
valued by branch as a property of value Rs.59 Lakhs.
The branch had taken the property as additional
collateral security instead of as a substitute for
very valuable and legitimate property of 1020 sq.ft.
which was already lodged with the bank. We asked
first property to be returned but it was not done so
by the bank with verbal assurance given by the branch
that a comfortable value of collateral would enable
the bank to sanction enhancements and immediate
future requirements quickly. The regional office made
the temporary limit to permanent by this sanction
order no.30398 SL.No.MDDRPR 1140/gad/207/ OG as non-
priority advance. Eventually during november 1996 we
submitted a proposal for installation of 12 sulzer
weaving machines in two phases ( 6 machines in phase
1 and another 6 machines in phase II). In phase I we
requested a term loan of 216.68 lakhs as a term loan,
out which 107.46 lakhs was requested as a US Dollar
denominated term loan. The branch manager sent us a
query during mid Dec’96 seeking clarification
relating to the net worth of the company, net worth
of the promoters etc., all the particulars called for
by the branch were elaborately presented vide our
note to the branch manager dated 22/12/1996.
Eventually the director of the company paid a visit
of Head Office to meet with officers in foreign
exchange department and further elaborated on the
project proposals. Again on 31/12/1996 detailed
financial workings were submitted explaining debt
service coverage ratio etc., But bank later turned
down the proposal with simple observation that “ The
banks exposure to foreign currency risks is limited
to 3 years”.
The PCL sanctioned remained at the same level until
the middle of 1997 but the branch imposed procedural
restrictions even about availing Rs.15 lakhs
sanctioned to us. On 27/04/1997 we have shown our
workings to the bank that our PCL requirement was
Rs.52.728 lakhs. Again 20/06/1997 we submitted our
proposals for enhancement with detailed financial
projections and workings to request for PCL to be
enhanced to Rs.45 lakhs and FUBP limit to Rs.60
lakhs seeking a total of Rs.110 lakhs. The Assistant
General Manager of the foreign exchange department of
the Head Office vide sanction order S.No.10616 (FEX
18-8/ PF 7087 dt.22/10/1997) sanctioned PCL as Rs.25
lakhs (with a sub-limit of PCL against orders not
back by LC of Rs.15 lakhs) and an FUBP Rs.45 lakhs
giving us a total of Rs.70 lakhs as a overall limit.
It was pointed out by our letter dated 05.11.1997
that the limit sanctioned were insufficient showing
that the orders to be executed with in the next 3
weeks amounted to Rs.40 lakhs and apart from this the
additional tentative shipping schedule for the next 7
weeks amounted to Rs.37 lakhs, by the same letter
we request the banks to consider our representation
for enhancement to the level as requested to the PCL
of Rs.45 lakhs and FUBP limit of Rs.60 lakhs. The
branch also conveyed to the Regional Office that the
borrowers are not satisfied to the new limits
sanctioned to them.
After 7 months the Regional Officer partially
consider to our request vide the sanction letter
MDSR/MLS/-/98/dated 15.06.1998 by temporary enhancing
PCL to Rs.38 lakhs for a period of 2 months and
FUBP/FDBP limit to Rs.60 lakhs for a period of 3
months. We explained the nature of our requirements
once again vide our letter dated 22/02/1998 drawing
attention to the fact that our original requirements
to enhance the PCL to Rs.75 lakhs and FUPB
proportionately . After repeated representation the
temporary limit revalidated again as a temporary
limit without further enhancement by the Regional
Office and revalidation was to be valid upto
31/01/1999. In the mean time the conditions stated in
sanction orders were to be complied with.
By our letter dated 03/11/1998 we submitted
that we had achieved 2 times (200%) of the turnover
projected after obtaining the temporary limits. It
was shown that orders on hand for the next 6 weeks
amounted to US $ 150,000 and approximately US $
500,000 expected to the confirmed for the next 6
months. Stating that our requirement for funds were
on the order of Rs.75 lakhs as PCL we requested the
Regional Manager to at least revalidate the temporary
PCL and FUBP sanction immediately.
It was very clearly stated that the current
level of Rs.38 lakhs of the PCL was too insufficient
to process even half the orders on hand. It was
emphatically stated as follows :
“ Unless the desired levels of credit limits
are [ not] sanctioned immediately, it may not be
possible to implement the orders on hand and maintain
the reputation so for created by us with our Buyers.
This note may please be treated as extremely urgent
…….”
Until Dec 1998 our performance, with all
these banking constraints was as follows :
1996 – 97 US $ 106,600
1997 – 98 US $ 361,852
1998 ( 9 months) US $ 395, 850 (
turnover for 98-99 was US $ 473,476)
Achievable for the next 12 months US $ 900,000
Orders on hand for the next 6 months amounted
to US $ 340,525/= .The Buyer during a visit to canada
had indicated an off-take of as much US $ 700000.
This together with definite prospects of exports to
Argentina, Bazil and USA were discuttions were held
with important Buyers in the pressence of the
Additional Textile Commissioners who was also the
Executive Director of the Export Promotion Council.
All this was stated in our communication
dated February 3 1999 and it was emphasized that “ in
terms of direct fact to face contacts the company had
as many as 200 Buyers to work with “ which was enough
of a base to build up an “Export House”
The cycle time and profitability issues were
presented and elaborate workings were shown to press
for a PC limt of Rs.75 lakhss and an FUBP limit of
Rs.110 lakhs.
Attention was drawn to the procedural
problems experienced at the branch and the bank was
requested to minimise procedural difficulties and
make the PCL and FUBP limits flexible. Required
papers and working were submitted along with.
[ By this time, in the absence of term loan
support, the company had limit up an in house
tailoring unit, a baling machine, office assets,
built up a prime office building, a factory building
and had also acquired 28 shuttle weaving machines to
weave terry fabric].
The director met with the Assistant General
Manager at Chennai on 9th March 1999, and on the
following day a letter was sent on 10th March 1999.
One of the Bank’s concerns at this point of time was
that the company had obtained a saction from SIPCOT
for a Term Loan of Rs.150 lakhs. The details of the
sanction were presented in the letter dated 10th
March 1999.
It was clarified that the collateral security
lodged with SIPCOT was different from the security
offered to Federak Bank. It was also explained that
the term loan was not availed attention was also
drawn to the fact that the term loan sanction from
SIPCOT was for the same project proposal that
Federal Bank did not entertain. Following this the
bank insisted on an assurance that we will not avail
the sanctioned term loan from SIPCOT without the
approval of Federal Bank. So on 26/03/1999 an
undertaking seven points as suggested by the bank
including “We hereby undertake to “infom”
M/S.Federal Bank Limited before availing the above
said term loan by M/S. SIPCOT limited, Chennai.
The undertaking was enforced on us even after
it was clearly shown that we had already qualified
for the term loan and that the source of additional
promoter’s contribution was external to the current
sources and that the collateral security offered was
a different property as distinct from the collateral
security offered to Federal Bank, for the existing
Rs.38 lakhs limit.
After all these commitments that the bank was
avaiting for Rs.60 lakhs as PCL was sanctioned and
a FDBP / FUBP limit (the bank never allowed us to do
business on non L/C terms) of Rs.75 lakhs ,vide
sanction order no.00097/MDSR/PF/1353/FEX/69/99
dated 30/03/1999.
Out of the Rs.60 lakhs the bank requested the actual
L/C document on hand (all order were on L/C terms,
but by practice L/C document was never received
before the actual time of shipment) to avail Rs.10
lakhs out of Rs.60 lakhs, which rendered the sanction
effectively as a sanction of Rs.50 lakhs with
procedural strings attached to the remaining Rs.10
lakhs. FDBP was to be granted, as per the terms of
the sanction against L/C / Orders and FUBP was to be
granted against L/C Only. FDBP / FUBP together
amounted to Rs.75 lakhs but in practice the company
was never allowed to avail the FUBP sanction because
the bank refused documents even when there was proof
that the L/C was in transit .

Procedural formalities as usual delyed the useability
of the sanction and even as on 5th April we were
submitted requirements for special permission to
avail loans of amounts as low as Rs.2 lakhs when the
sanction was for Rs.60 lakhs.

With regard to the FDDP sanction the bank not only
refused to encourage exports on non L/C terms, but
even with our existing buyer even with an L/C on hand
the bank resorted to treating the bills as RABC.

RABC was a so called facility by which the bank sent
the bills for collection, without treating the bills
as purchased. RABC reduced the drawing power not
only from the FDDP/ FUBP limits, but also affected
the drawing power of the PC Limits, to the extent of
the value of the bills treated under RABC.

A shipment of Rs.832,986 was treated as RABC on march
3, 1999 and the branch chose to “hold” the amount
even as on May 5,1999 when we note to the AGM, also
informing him that the company had received
confirmation that the Buyer cleared that goods and
accepted the documents as per terms of the L/C. It
was pointed out that we had an ECGC limit of Rs.15
lakhs for our Buyer to meet contingencies like this
transaction (which was a L/C transaction treated as a
non L/C transaction by the bank). After several
meetings and written communication we were allowed to
avail the Rs.8.32 lakhs during the third week of May
1999.

This was in fact after we troubled our buyer to ak
the bank of montreal to send a telex message to the
bank stating that the payment was due on may 21,
explicitly stating “you may release reserve, if any”.
While our progress improved from US $ 106,600 in 1996-
97 to US $ 473,476 in 1998-99 a 4 fold increase in
3 years (inspite of all the banking problems) the
bank had
Refused to consider a promising proposal for
creating manufacturing facilities
Locked us from utilizing a term loan of
Rs.1.5 crores sanctioned by SIPCOT
Took our 180 days to partially concede to
our requirement as PCL of Rs.75 lakhs
originally submitted on 22/09/1998 by its sanction of
Rs.60 lakhs, which by itself was not a clear
limit, on 22-09-1998 which further took disbursal
Delays. It was only on 23/08/2000 that the
bank sanctioned limits as
Requested as Rs.80 lakhs ( in the meantime
there were revised requirements
of as much as Rs.160 lakhs PCL). So the
bank effectively took approximately
700 days to respond to our requirement by
which time we had lost several
orders for want of funds, lost on reputation for
timely execution of order
accepted, incurred higher cost of production, non-
productively and growth
prospects. Enough and more damage was done to our
finances by all the
time delays, the bank did not acknowledge its own
role in our reduced
performance when it sent a advanced letter on
04/11/1999 that one of the
packing credit loan amounting to Rs.3.75 lakhs drawn
on may,18,1999 would
fall “Overdue” as it would reach 180 days two weeks
hence, on 18/11/1999.
(This was eventually closed on time delay at the bank
were one of the
reasons why production was so delayed that we sent
two shipments to
canada by air, while the agreed terms of shipments by
sea.

This was at a point of time when We had e had
commissioned 22 out of 28
terry weaving machines and the machines were
operations.
Our factory building for the tailoring unit of 5000
square feet was built up with
24 sewing machines and an electronic baling machine
operational.
A visit by our buyer from Canada to our factory and
office in October 1999.
Our performance was ALL SET to leap up with order
placed on Nov 5, 1999
vide purchase order EA No.5133,5134,5135 confirming
terms of payment as
L/C 30 days. The orders were for 10 x 40 ‘ container
volume of shop towels
(3000 bales), 30240 units of 3 ply Diapers and
1,36,260 dozens of Terry
Towels.
By our buyer alone amounting to US $ 803,750 (equal
at the day’s exchange rate of Rs.3.43 crores) to be
shipped- out during Jan – October 2000.

All of the orders on hand were of revised
specification, so goods were to the produced a fresh,
and it required swift action. These records were
immediately presented to the bank and nothing
happened for 3 weeks
Vide our letter to the bank dated 26/11/1999 to the
bank it was shown that Rs.2.3 crores out of Rs.3.4
crores worth of orders were to be shipped within the
next 120 days.
As on this date our PCL still remained as Rs.60 lakhs
with immense prcedural difficulties plagning us from
availing even the Rs.60 lakhs in full. To executie
the orders on hand of Rs.3.42 crores, out of which
2.4 crores worth of goods were to be shipped with the
next 120 days we requested sufficient limits ( our
requirement was a PCL of at least Rs.160 lakhs) to be
made available, and we even proposed that the limits
be sanctioned as temporary limits, in order to make
the bank feel comfortable.
The bank was silent. Nothing happened until Jan
14,2000 and alanced by the production delays that
resulted from the bank’s irresponsiveness we agreed
for a reduction in the volume of goods ordered as
follows :
REDUCTION IN QUANTITIES :
Terry Towels agreed as 93150 doz in place of 136,620
doz.
Shop towels agreed as 2040 bales in place of 3000
bales
DELIVERY RESCHEDULE :
Terry Towels : Remaing for the first order, stretched
by 30 days.
Shop Towels : Time for the First remaining order
extended by 5 week

The Revised schedule was submitted to bank
and on 29/02/2000 we pointed out that the orders on
hand for exceeded the available limit of Rs.60 lakhs.
Even at this time we were making requests and special
requests to make the Rs.60 lakhs fully available.
While we were serviceing our production
requirements part by utilizing facilities in-house
and part by sub-contracting our production process,
our infrastructure needs were increasingly felt time
and again it was pointed out to the bank that quality
and cost factors make it imperative that we buld up
in house facilities.
With the term loan from SIPCOT still
unutilized, the company wished to make use of an
unique opportunity made possible by a special fund
for Textile Industry Modernization called TUF scheme
announced by the government of India. By this scheme
Rs.25,000 crores were made available for funding
textile modernization. Longer repayment periods at 5
% lower rate of interest and a highly encouraging
funding environment together constituted an
opportunity for us to seek funding under TUF . Our
technical expertise and understanding of
manufacturing technology and processes now covered
spinning, yarn dyeing, Fabric weaving, Terry Weaving,
Fabric processing, tailoring / garment making.
It required several visits to the branch, a
few visits to the Regional office and Head office,
over 400 elaborate, time consuming letters, several
fax and email messages to obtain, avail and operate
the limited limits, against our capabilities,
performance, growth record and prospects. The bank
was cripplingly conservative and far too security
oriented.
What ought to have been less than a clerical
work, required the Director’s direct involvement,
taking his time away from valuable and important
matters to unnecessarily imposed banking formalities,
which not only wasted valuable time and diverted
focus, but kept the financial position uncertain –
ALL THE TIME procedural difficulties were such that
for the first 18 months of operation the company had
a practice of transferring packing credit loan in
lump sums of Rs.10 or 15 lakhs when the actual
requirement for the day was Rs.1 or Rs.2 lakhs so to
say.
To avoid uncertainties, larger amounts were
transferred at one stroke to our current account at
the same branch, which did not pay interest for the
interst-charged PCL transfer. This was to avoid
uncertainities and unwanted unforeseen objections by
the branch citing trivial imaginary procedural
problems.
At every time limit was temporarily sanctioned and
every time the temporarily sanctioned limit was made
permanent and every time there was an enhancement
some kind, elaborate legal/documentation formalities
were carried out whch by itself was time consuming
and time delaying process.