Why this blog ?

...

I have a problem.

I have a good network of friends and advisors who are willing to spend time to solve my problem. But all of them say " Come back to me without the problem, I will solve your problem"....

This is a situation where my company, a company that has had a very prosperous start and ample growth opportunities, had a banking problem with a small commercial bank with an irregular branch in a small town, which reversed all the progress that the company made, blocked all futher progress and when appealed for attention ignored the appeals and when represented to Government declared the account an NPA, moved court, intransigently refuses to furnish transaction details, and prevents the company and the Directors from doing business with any other bank, which in effect prevents us from doing business. The banking system keeps us incapacitated even to fight for a fair hearing.

Good friends who advise us repeatedly caution me that it is very very difficult to start any kind of business unless we agree on a settlement.

Which makes me all the more resistant to the idea of dropping the issue which is fundamental:

How can the banking system and the regulatory authorities take all reports from all banks on NPAs without due scrutiny, and how can the system at large be so harsh on the so called NPAs without going into the background of what caused such a status?

The judicial system has taken almost 4 years to begin to understand that the bank has to furnish detailed accounts (the particular branch had a chaotic system of accounting in a situation where two subsequent branch management were remarkably irregular, to say the very least) and all other banks refuse to take up this account, or look at proposals for new, even more promising ventures, dismissing our approach prima facie, on the grounds that our account with Federal Bank is an NPA.

The banking sector doesn't go into the details and perhaps find it convenient to silently support the bank largely at fault.

Here is a summary of the problem:

• Name of the Company: Whitefield Cottons P Limited
• Name of the Bank: Federal Bank Limited, Erode, Tamilnadu Branch
• since: March 1996 Limits: Rs 80 lakhs pre-shipment export packing credit (PCL) and Rs 120 lakhs of post-shipment export credit (FUBP)
• Liablities outstanding: 80 lakhs (US $ 190,000 approx) of principal, unsubstantiated, NO clear, legible accounts from the bank, which has been dodging for the last 4 years, repeated requests for a compreheinsive statement of accounts made at verious levels of the Bank Managment and through court, plus exaggerated interest.
• Security: Collaterals of actual vaue in excess of Rs 120 lakhs + personal gurantees by the Directors. Guarantee by a a family member who is harassed by the bank with misinformation, who in turn harasses the Directors and forces them to rush for a settlement.
• Performance of the Company: 98% of the company’s revenues in export earnings; over US $ 1.5 million in production exports in the first 4 years, in the absence of production infrastructure, an average credit limit of $ 100,000, proceduaral hurdles and several other limitations.

Clean banking transaction record, ample and valid collateral securities and guarantees, 95% exports against irrevocable letters of credit, all realized without any problem, all proceeds routed through the bank direct from the Customer's overseas bank.

General Background:

Our company had a very good start. A direct export order form a large Canadian company, against an irrevocable letter of credit from a first class bank . We went to Federal Bank that gave us 15 lakhs ad hoc against guarantees and collaterals. We made an estimate of our requirements, asked for 75 lakhs. Over the next two and a half years, the bank confirmed the ad hoc limit of Rs 15 lakhs to a permanent limit of 15 lakhs, then 20 lakhs, then 25 lakhs, then 38 lakhs ad hoc, 45 lakhs permanent, 60 lakhs, and after two and a half years it met our requirement of two and a half years ago.

During these two and a half years we were met with several procedural hurdles and two bad, very bad branch managements that included two officers charge sheeted or internally reprimanded for blatantly corrupt practices and for frauds that compromised on the integrity of the customers' accounts. With all the banking procedural problems and delays we were performing very well as an exporter and our performance improved from US $ 106,600 in 1996-97 to US $ 473,476 in 1998-99 a four-fold growth of performance in 3 years.

This could have been far more if the bank had been professional and if the branch administration was clean in its assessment and service.

Banking Problems:

1. The bank Refused to consider a promising proposal for creating manufacturing facilities.
2. The bank blocked us from utilizing a term loan of Rs.1.5 crores sanctioned by the State Industries Promotion Corporation of Tamilnadu Limited.
3. The bank took our 180 days to partially concede to our requirement as PCL of Rs.75 lakhs.
4. The bank took 700 days to fully sanction our requirement in full, by white time the sanction was too little.
   The bank prevented us from moving to any other bank which could have more responsive. Our company is based in Erode, a small town, where such restrictive measures were locally possible.
5. The bank hurt a major export order for US $ 803,750 placed by our regular buyer who had established a buying record well known to the bank, in spite of our repeated request for assessment of this highly time sensitive situation. At that point of time our limits were Rs 80 lakhs of Packing Credit and Rs 105 lakhs. The Packing Credit was fully utilized while all the bills purchased by the bank had realized, but the bank did not offer us the flexibility by considering the unitized portion of the post shipment limits usable. Nor did the bank allow us even the marginal flexibility of exceeding the sanctioned and kept our account "frozen" rigidly at Rs 80 lakhs, not allowing us to exceed the sanctioned Packing Credit limit even by a fraction. With this impossible situation the export order of US $ 803, 750 could only be partially executed, that too with market borrowings forced upon us by the situation, which was also not sufficient, so the production was delayed, quantities ordered were reduced and finally the order was largely cancelled. As a result our progress began to reverse, and our company's finances were severely damaged. The bank watched us degenerate and collapse without even acknowledging that its Erode Branch has hurt a customer so badly.
6. The bank has done more serious damage by keeping our account frozen at Rs 80 lakhs, due to this refusal our business came to a standstill during the last four years with prosperous opportunities for growth and profit foregone and the losses are increasing.
7. The bank blindly refuses to evaluate our requirements, problems and prospects in spite of various repeated requests for a comprehensive understanding of our problems and prospects.
8. During the last six years the bank has been completely silent on its role, refuses to acknowledge any communication from us to its Chairman or other officials.
9. The bank has not provided us with a comprehensive statement of our transactions after repeated requests from us. The bank's accounting system at the branch was very vague, it accounting format was confused and the bank is very reluctant to furnish us with a comprehensive statement of accounts. The need for a comprehensive statement of accounts is significant in the light of all the fraud that happened at the Branch that compromised on the integrity of the accounts at the Branch. [ Even at the DRT the bank has been evasive on our repeated petitions for a statement of account for over 36 months.]
10. During the first four years of operation the procedural hurdles and delays at this bank limited our growth prospects in terms of establishing manufacturing facilities and accepting larger export orders. During the last four years whatever little progress that was made during the first four years was reversed, which caused considerable erosion of our inventories and other resources which left us crippled.
11. There were various ways by which we were affected. Our work in process of that time was rendered unusable midway due to the situation forced upon us by the bank's total disregard for our needs and the way it kept our account frozen. There were various other practical business factors that come into play when flow of resources were blocked. For instance alternative market borrowings that were forced upon us by the situation was prohibitively expensive. The quality of materials purchased with contingent market credit could not be assured. Time delays were expensive with a multiplier effect. One major problem lead to a multiplicity of problems and the losses multiplied, our various resources decayed during the last three years and the combined effect is such that it absorbed the money invested in stocks and work in progress.
12. The bank was completely unwilling to allow us to move to any other bank that had a good understanding of our clean transaction record and prospects, nor did the bank allow us to create the manufacturing facilities required with Term Loan assistance from supportive term lending institutions.

Present Status:

The company's account remains classified as an NPA for the last 4 years. The company approached several banks, term lending institutions and venture capitalists all of whom are uncomfortable with the status and the history of the company's representations to various levels of management at the bank as also to the RBI and the Ministries.

A case filed by the bank at the DRT is slipshod in description and unsubstantiated as it conatains no details of how the liability was arrived at. A petition filed at the DRT for a comprehensive statement of accounts is very very slowly progressing with the Presiding Officer not posted in DRT Coimbatore during a 2 year period, and now as the petition won an appeal at the DRAT for another hearing, all cases at DRT Coimbatore are moved to DRT Madurai....As on April 9, 2007 the DRAT's some what favorable order has not been taken up by the DRT, because of the delays in the jurisdictional realignments within DRT, which has finally not taken effect.

The NPA stautus that was accorded on the company without due scrunity of the bank's role in causing it, cripples the company, keeps the company from any banking facility from any bank, financial institution or private equity fund, which in normal circumstances would have built up this company into a very valuable, high growth company...

The Directors have shaped up new ventures that remain unbankable due to the NPA stauts of this company....

This is the misinformation. The NPA status and how the status is circulated among banks, investors and other financial institutions, in complete suppression of the bank's role in first limiting and finally reversing the progress that the company, and in complete suppression of the facts relating to all the damages that the bank has caused...

The practical advise that I receive is "Give up your scrutiny. Pay up. Whatever the bank wants. Get out of the NPA status..." This happens to be from a very good friend, who knows the banking system in and out, who has been exasperatedly trying to help me. He knows that that is the only thing that I can do. He perhaps knows that the banks would gang up against me if I fight a legal battle against one of them. And How do I pay up? 1. You have caused my business to close down. You have kept me incapacitated. You have caused all that I built up to evaporate into nothingness.

( In business a strange kind of arithmetic happens, in times of trouble. For e.g

Losses at the beginning of the year : 10 lakhs.
Expenses during the year 10 lakhs.
Revenues 0.
What are my accumulated losses at the end of the year ?
Arithmetic and Logic says 10+10-0 equals 20, so the accumulated losses is 20 lakhs at the end of the year.
WRONG.
That is not what happens in times of trouble.
In times of trouble the total of 10+10-0 actually amounts to a mysterious total of 40 or 50... .
Imagine what happens if a company is forced to stay in this situation for over 6 years ? )

So

• What resources can the company be possibly left with and where does it go after 6 years of incapacitation forced upon it?
• The bank and the banking environment has blocked the company and individuals from regenerating the business or restarting any new venture.
• The company does not have the resources, I don't have the resources, the family comes in. In India, family plays an integral part of any business, proprietary, partnership or incorporated. First the family writes you off in times of trouble. Then the family offers to dissolve one of the properties to pay up... In my case, the resources are not from my own family and I don't want to draw resources from the guarantor, in order to dissolve a liability that was unfairly built up and cleverly exaggerated. The bank misleads the family, which is a crucial non-business factor in Indian business, by misinformation which amounts to professional, crafty psychological pressure on the gullible.
• Dropping this issue is unfair. In a more defined legal framework, the damages that the legal system would consider would amount to what the bank can not bear. This company is in India and the tort reforms are yet to happen. Any company faces these judicial limitations.
• What if I make the unfair decision of dropping the issue with little regard to the immeasurable damage that the situation has caused me? What if I allow one of the family properties to be dissolved and allow them to pay up?
  

a) The banking system wouldn't set the NPA record straight as swiftly as it brought in the status. The process of removing the status will take 3 years at least ? and
b) Even if an Angel of a banker says yes to a new venture, the family at the background says, no more of business ventures....

This NPA status is this unfair.

So this blog, titled " Information". It is unconventional, but if there is an alternate way of balancing or countering the misinformation that goes by a generalized ranking dubbed "NPA", I wouldn't have published this in a blog.

The present status is that an application is sent to RBI under the Right to Information Act to gather information pertaining to the status of the company and its Directors, and a notice to the bank under the same act to furnish the statement of account that it has been intransigently evading for the past 5 years now.

http://duediligenceindia.blogspot.com/2007/01/rti-application-sent-to-rbi.html

Some documents sent to RBI and the Bank and to the Ministries that summarise some of the problems are posted in this blog.