Author: Ritu Singh

HDFC Bank’s mortgage head Arvind Kapil resigns to lead Poonawalla Fincorp, brokerages flag attrition risk

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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HDFC Bank’s mortgage business head Arvind Kapil is leaving the bank to head Pune-headquartered non-bank lender Poonawalla Fincorp, the country’s largest private lender said on March 18.

In an exchange filing, Poonawalla Fincorp said its board had approved the appointment of Kapil as the MD and CEO of the non-banking financial corporation (NBFC) effective June 24, 2024 for a five-year period.

Kapil currently heads the mortgage business at HDFC Bank where he manages a book size of ₹7.4 trillion, constituting nearly 30% of the bank’s total loan portfolio.

While there have been over a dozen exits from HDFC Bank since its long-time CEO Aditya Puri moved on in 2020, including some due to retirement, Kapil’s is the first major exit from HDFC Bank under CEO Sashidhar Jagdishan.

Also Read | Mutual funds buy HDFC Bank shares worth ₹21,900 crore in two months: Have you invested in these?

Before Kapil, Santosh Nair, then CEO of HDFC Sales (a subsidiary of HDFC Bank, the distribution arm of the bank) quit to join Bandhan Bank as the head of consumer lending and mortgages in February this year.

Arvind Kapil’s exit

As per CNBC-TV18’s sources within HDFC Bank, Kapil’s exit was linked to his desire for growth in his role, and no other significant reasons. “Everyone wants a better position, growth in career..He has played a big role in HDFC Bank and we appreciate that,” said a person familiar with the matter who did not wish to be quoted.

“In our view, Arvind is in his early 50s and now gets to be the CEO…not sure whether he would have got that opportunity in the bank…he gets to be the CEO now…Also one could argue that earlier he was managing entire retail portfolio and the recent shuffle he was given mortgages and retail assets (excl mortgages) went to Arvind Vohra who earlier was the head of branch banking (basically liabilities head),” Suresh Ganapathy, the head of financials research at Macquarie Capital Securities said in a note.

Kapil is an HDFC Bank veteran as he has been with the lender for over 25 years since his joining in December 1998. He took over the mortgage business, including Home Loan, Loans Against Property, and HDFC Sales in October last year, in a mega-rejig announced by the bank following its merger with the parent company Housing Development Finance Corporation (HDFC) Limited.

]Prior to this, Kapil headed the retail assets segment for the bank, which is now being handled by Arvind Vohra (ex mortgages).

It is unclear who the bank will name as Kapil’s successor to lead the large mortgage business.

Attrition Risk at HDFC Bank?

Several brokerages believe that this senior level exit may signify an attrition risk at HDFC Bank.

Macquarie said, “Given the sheer size of the mortgage portfolio and the material importance of distribution, we believe there is key managerial personnel (KMP) risk. We continue to monitor any further senior management/business head resignations.”

“This is tad negative given his (Arvind Kapil’s) seniority, some recent exits at HDFCB to join Bandhan Bk & risk of attrition of teams. So, retention & smooth transition will be key, bank’s strong talent base is a comfort,” equity research firm Jefferies said in a note.

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However, others like Nomura said the move will not have a material impact on the lender’s business as it has significant depth in its senior management.

“HDFC Bank has a significant depth in senior management, which it has demonstrated in the past as well. We do not expect any material impact on the business owing to this change in senior management. However, we believe any similar churn at the senior management level over the near-to-medium term will be a key monitorable,” Nomura said.

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Paytm Payments Bank Crackdown: Money laundering due to weak KYC processes, bank ownership structure forced RBI’s hand

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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It’s shutters down for Paytm’s Payments Bank ambitions, at least for the moment, with the Reserve Bank of India (RBI) coming down hard on the fintech giant for lapses in compliance and risk management practices. According to sources, the bank was persistently non-compliant with regulatory guidelines, forcing RBI to bring down the hammer.

Nearly two years after barring Paytm Payments Bank Limited (PPBL) from onboarding any new customers on March 11, 2022, the regulator on Wednesday imposed severe and unprecedented restrictions on the entity, effectively shutting down its banking operations.

Citing “persistent non-compliance, and continued material supervisory concerns” in the payments bank, the RBI barred it from accepting any further deposits, undertaking any credit transactions, or allowing customers to top up their Paytm Payments Bank wallet after February 29, 2024. This made it clear that Paytm Payments Bank could not undertake any banking operations whatsoever after February 29, 2024, barring facilitating the withdrawal or utilisation of wallet balances by customers.

Paytm Payments Bank’s parent entity, One 97 Communications, lost nearly $2.4 billion in market capitalisation in the last two days of trading on the back of RBI’s crackdown on the bank, with One 97’s shares plunging nearly 40% between February 1 and 2.

CNBC-TV18 spoke to multiple people directly and indirectly involved in the matter to understand what led to this action from the regulator against Paytm Payments Bank, and two major reasons have emerged.

MAJOR KYC LAPSES

The biggest and most concerning factor for the regulator was the major lapses in PPBL’s Know Your Customer (KYC) processes, wherein the RBI found that no proper checks were done by Paytm Payments Bank to onboard customers (running into lakhs), leading to multiple instances of misuse, including money laundering activities, said people in know.

These inadequate KYC processes led to miscreants using the same PAN Card to open “thousands” of accounts, for instance, leading to fraud. In some cases, sources said, the same PAN was linked to more than 100 customers, and even over 1,000. Fraudsters sometimes even used fake PAN Cards to open accounts, said a person familiar with the matter, on condition of anonymity.

Paytm Payments Bank had little oversight on the end use of these funds, and was often found in violation of anti-money laundering KYC norms with the total value of transitions running into crores of rupees — much beyond regulatory limits in minimum KYC prepaid instruments, the person added. Another matter of concern for the RBI was an unusually high number of dormant accounts, which, the source said, could have been used as mule accounts.

RBI had flagged these concerns to Paytm Payments Bank at least a couple of years before it decided to bar the bank from onboarding any new customers in March 2022, as per people in the know. The RBI had also flagged lapses in the bank’s IT systems then, asking it to appoint a third-party firm to conduct a comprehensive audit of its IT systems. Furthermore, sources said, the compliance reports submitted by the bank were found to be incomplete and false on many occasions.

Just days before RBI’s action, the Indian Highways Management Company (IHMCL), an arm of NHAI, barred Paytm Payments Bank from issuing fresh FASTags, while also banning it from taking up any new toll plazas that are part of the National Electronic Toll Collection. Reports suggested that this action was taken after an audit by IHMCL found that the entity was not complying with the parameters prescribed in the service level agreement (SLA). CNBC-TV18 has reached out to IHMCL and a response is awaited.

PAYTM PAYMENTS BANK SHAREHOLDING STRUCTURE CONCERNS

The other major issue that led to the RBI action was the lack of an arms-length distance between the bank and other entities of One 97 Communications, CNBC-TV18 has learnt.

According to people in the know, the regulator has been flagging concerns about a lack of separation between the operations of Paytm Payments Bank operations and other group entities over the past few years to ring-fence the bank from any potential risks from related Paytm entities.

Paytm Payment Bank’s shareholding pattern shows that the parent entity, One 97 Communications, owns a 49% stake in the bank with the remainder held by founder Vijay Shekhar Sharma in a personal capacity.

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The regulator has flagged concerns about increased inter-dependence between the bank and other entities, related party transactions and interference in the bank’s decision-making by its parent entity and founder, said a person with knowledge of the matter.

The person also told CNBC-Tv18 that the bank had significant undisclosed payables to One 97. Additionally, agreements were frequently amended to favour OCL (One 97 Communications Limited) or its group entities, seemingly at the expense of the bank and its clients.

Despite raising these concerns privately with Paytm Payments Bank, and publicly barring the bank from onboarding customers two years earlier, deficiencies were observed in compliance with these observations, prompting RBI to clamp down on Paytm’s banking business, bringing it to a stop, effectively.

Paytm Payments Bank, however, maintains that the parent entity, despite its large shareholding in the bank, exerts no influence on the operations of Paytm Payments Bank whatsoever. “We would take this opportunity to clarify that, as per banking regulations, Paytm Payments Bank Limited is run independently by its management and board. While OCL (One 97 Communications Limited) is allowed to have two seats on the board of Paytm Payments Bank Limited, as a part of its shareholder agreement, OCL exerts no influence on the operations of Paytm Payments Bank Limited other than as a minority board member and minority shareholder,” the company stated in a press note issued on February 2.

NO BEARING ON FINTECHS

Sources said that the RBI’s order is not an indicator that the central bank is against the fintech industry. The sources added that the intervention was only aimed at safeguarding the financial system, ensuring that a payment bank — a regulated entity dealing in public funds — operates in a manner that doesn’t harm the interests of depositors, customers, and legitimate stakeholders.

THE WAY FORWARD

“On behalf of Paytm, I can say that it is more of a big speed bump, but it is something that we believe that, with the partnership of other banks and the capabilities that we have already developed, we’ll be able to see through in the next few days or quarters, as the case might be,” said Vijay Shekhar Sharma, trying to allay concerns about the bank’s future in a conference call with analysts following the RBI order.

“There are, obviously, RBI’s beliefs, and we believe that there is something that RBI would have seen. Have they sent us details? The answer is no … what different audits did (the RBI do) and the solutions based on that is (what led to the order). So we don’t know exactly what figured, when,” Sharma said, explaining that there was no big reason for RBI’s actions that Paytm was aware of.

As for the impact on the business in terms of a financial hit, Madhur Deora, Chief Financial Officer of Paytm, explained to analysts, “Overall, the worst-case margin, the EBITDA margin impact of that is ₹300-500 crore. We have called that an annual EBITDA impact. I do expect that over time, we’ll be able to offset this in a big way, but we have said it will be an annual impact.”

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“This … will have some impact from coming in from lending — we will not be extending loans for maybe a couple of weeks until we solve the operational challenges, and then we go back to normal,” added Bhavesh Gupta, the President and COO of the firm.

The first overhang is when, and more importantly if, the regulator will relax the restrictions on the Payments bank. In previous instances of such actions from RBI, the regulator would word its notification clarifying that whatever restrictions were imposed would be lifted if the entity rectified the deficiency in some form or fashion, which was not the case with Paytm.

Secondly, the concern is whether lending relationships would also take a hit due to reputational risks. Brokerage firm Macquarie noted, “The bigger issue is Paytm has not been on the good books of the regulator and going forward, their lending partners also could possibly relook the relationships in our view.”  Macquarie has likened the action to RBI indirectly revoking the PPL license.

And finally, the bigger worry on the street now is whether RBI is done with its penalties just yet, or if a final clampdown is around the corner.

Also read: ‘Disaster in the making’: Ex-RBI official on Paytm bank order

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BYJU’s investors call for EGM, seek leadership change: Sources

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Several major investors in BYJU’s have collectively issued a notice to the troubled edtech giant, calling for an extraordinary general meeting (EGM) to change the existing leadership and reconstitute the board of directors, citing persistent issues relating to corporate governance, mismanagement and compliance, CNBC-TV18 has learnt.

Signatories to the EGM notice include Prosus, General Atlantic, Peak XV, Sofina, Chan Zuckerberg, Owl and Sands, according to sources. These investors collectively represent nearly 30% of the shareholders of the edtech company. The EGM has been called on February 23, a person directly aware of the development told CNBC-TV18.

“Pursuant to the rights granted to shareholders under the Companies Act, 2013, a notice has [today] been issued to Think & Learn Private Limited (T&L) shareholders requesting an extraordinary general meeting (EGM) to address persistent issues,” the investors said in a statement that CNBC-TV18 has reviewed.

According to sources, the request follows earlier notices of requisition sent to the T&L Board in July and December 2023, which were disregarded, the investors said in their statement.

The resolutions being put forward for the EGM to consider include a request for the “resolution of the outstanding governance, financial mismanagement and compliance issues; the reconstitution of the Board of Directors, so that it is no longer controlled by the founders of T&L, and a change in leadership of the Company”.

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While there have been differences between BYJU’s founders and its investors before, this is the first time that investors have come together to seek a management change, the ouster of Byju Raveendran from the board and his removal from the day-to-day management of the firm. In June 2023, the representatives of its key investors Prosus, Peak XV Partners and Chan Zuckerberg Initiative resigned from the board due to differences with the founders.

The current board of directors of BYJU’s parent T&L comprises Byju Raveendran, cofounder and wife Divya Gokulnath, and his brother Riju Raveendran.

The investors said in the notice that the issuance of this EGM notice follows “many months of continued efforts by shareholders to engage with the Company to address persistent issues relating to corporate governance, mismanagement and compliance. These efforts have been ongoing following the resignation from the Board in June 2023 of directors nominated by Prosus and other shareholders.”

“While we are grateful for the efforts of the independent advisory council — which includes Rajnish Kumar and Mohandas Pai — in addressing some of the looming challenges facing T&L, we are deeply concerned about the future stability of the Company under its current leadership and with the current constitution of the Board,” the investors said in their statement.

The investors further stated, “We believe wholeheartedly in India and in the transformative role that education technology can play in improving teaching and learning. We also continue to believe in the role and contribution of BYJU’s. As shareholders, we will continue to assert our rights, in collaboration with other shareholders and government authorities to safeguard the long-term interests of the Company and its stakeholders.”

The move comes just days after BYJU’s issued a notice to its investors to raise $200 million via a rights issue at a post-money valuation of merely $225 million, which is at a 99% discount to BYJU’s peak valuation of $22 billion.

It remains to be seen if investors will subscribe to this proposed rights issue, and if not, it may lead to some changes in the shareholding pattern and ownership structure of the edtech company.

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udaan layoffs: B2B unicorn lets go of 10% workforce days after raising a $340 million funding round

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Business-to-business e-commerce unicorn udaan has laid off about 100-150 employees following a restructuring exercise as it looks to turn profitable ahead of its proposed public offering over the next year or so, sources told CNBC-TV18 on December 18.

The development comes just days after it had raised $340 million in a series E funding round led by M&G Plc, including participation from existing equity investors – Lightspeed Venture Partners and DST Global.

CNBC-TV18 has learnt that more than 100 employees were laid off in this round, constituting roughly 10% of the startup’s entire workforce. The latest round comes after udaan had let go of over 500 staffers in two phases in 2022.

In a recent exercise, udaan restructured its business units to consolidate the essentials businesses of FMCG, staples, and pharma, with the discretionary business of general merchandise, lifestyle, and electronics. Vivek Gupta, who was in charge of the essentials business, moved away from his operational role, and Uday Bhaskar was appointed to lead the consolidated unit.

The restructuring, it is understood, led to some redundancies, resulting in these layoffs.

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Confirming the development, udaan said in a statement to CNBC-TV18, “Over the last few years, we have made significant investments to build a solid and sustainable business. We believe in efficiency as a driver of profitable growth and are continuously making efforts to enhance efficiency, grow business sustainably and further improve customer experience. We have already made significant progress in our journey towards building a profitable business and continue to make relevant interventions to our already proven business model, while remaining customer centric and agile. However, these interventions have also resulted in some redundancies in the system.”

udaan added that it was working towards providing support to the impacted employees including medical insurance, compensation package as per company policy and placement assistance, without specifying the exact number of employees that were let go.

The layoffs are part of the Bengaluru-headquartered startup’s attempts to cut costs and turn profitable ahead of the proposed public offering, which it is targeting over the next 12-18 months.

After raising the $340 million funding last week, Vaibhav Gupta, co-founder and CEO, udaan, said, “Series E round strengthens our balance sheet and fully funds our business plan. It enables our continued journey of growth and profitability, positioning us well to be public-market ready in the next 12-18 months.”

Founded in 2016, the B2B eCommerce platform operates across categories including lifestyle, electronics, home and kitchen, staples, fruits & vegetables, FMCG, pharma, toys and general merchandise. It has three million plus retailers and thousands of sellers on the platform across the country.

The platform enables supply chain and logistics operations, focused on B2B trade and built on strong technology, for daily delivery across 1200+ cities and 12,500+ pin codes through udaanExpress. It also enables financial products and services to small businesses, manufacturers, and retailers through udaanCapital to grow their business.

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SpiceJet is one of three suitors interested in taking over GoFirst

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Just when lenders had given up hopes of finding a suitor for GoFirst, three entities have come forward to express interest in taking over the airline over the past week or so.

CNBC-TV18 has learnt that domestic carrier SpiceJet is among those who have shown an interest, and in a letter to the resolution professional (RP) of the airline, SpiceJet has sought time to conduct its diligence and evaluate the opportunity.

In the letter, SpiceJet has indicated that it was recently able to raise ₹2,250 crore and it could use some of those funds to acquire GoFirst, a Mumbai-based low-cost airline that filed for bankruptcy protection in May 2023.

Besides SpiceJet, Sharjah-based aviation consultant by the name of Sky One, and Safrik, an investment firm focused on Africa, have shown an interest in acquiring the bankrupt airline.

CNBC-TV18 reached out to all three companies and their responses are awaited.

So far, there’s no indication from any of the three suitors on how much they are willing to pay for GoFirst.

The RP is currently conducting a due diligence on the new suitors to see if they are eligible to bid.

The committee of creditors is expected to meet later this week to evaluate the next steps after the interest from these three companies.

CNBC-TV18 had earlier reported that GoFirst received no bids when the deadline ended on November 22 earlier. Without a single bidder, the lenders would have considered liquidation.

Now, banks will wait to see if SpiceJet, or any of the other suitors, make a compelling offer.  GoFirst is also caught in a bunch of litigation including those with its lessors.

SpiceJet shares were trading 7.7% higher at ₹57.72 on BSE at 12:07 pm.

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GoFirst IBC Case: Lenders to reassess funding plan amid uncertain prospects

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Cash-strapped airline GoFirst’s Committee of Creditors (CoC) convened a meeting on November 6 amid growing uncertainty about the airline’s future, CNBC-TV18 has learnt. The meeting comes as a result of growing concerns about the airline’s future, leading banks to re-evaluate their funding plan, as per people in the know.

Earlier this year, CNBC-TV18 reported that lenders had given an in-principle approval for approximately Rs 450 crore in interim financing for GoFirst in June. However, since then, the situation has turned worse with the ongoing litigation in the lessors aircraft deregistration matter and a clear lack of interest from potential investors and suitors.

The airline has total liabilities amounting to ₹11,463 crore, of which the bank dues make up ₹6,521 crore. Lenders, including Central Bank of India, Bank of Baroda, Deutsche Bank, and IDBI Bank, are among the key creditors involved in the case.

The Delhi High Court is currently hearing a case involving the de-registration of GoFirst’s aircraft, which is scheduled to be heard next on November 10. If the airline receives an adverse ruling from the court, it could spell further trouble for its already precarious financial position.

The Directorate General of Civil Aviation (DGCA) had recently informed the Delhi High Court via an affidavit that the government directive exempting aviation leases from the bankruptcy moratorium should be applicable even to companies undergoing insolvency proceedings.

This came as earlier in October, the Ministry of Corporate Affairs issued a notification stating that the provisions of sub-section (1) of section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC), would not be applicable to transactions, arrangements or agreements, under the Convention and the Protocol, relating to aircraft, aircraft engines, airframes and helicopters. This would imply that aircraft, engine and helicopter leases and other agreements will not be bound by a moratorium.

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With the risk of deregistration looming and the airline’s financial troubles deepening, banks are left in a state of wait-and-watch.

The airline’s attempts to woo suitors have also not been successful. CNBC-TV18 had earlier reported that Jindal Power was the only player to submit an Expression of Interest (EOI) for GoFirst, with other lesser-known suitors not meeting the eligibility criteria from lenders. This lack of interest has left lenders in a tough spot, and they are unwilling to extend further loans to GoFirst in the absence of a viable revival plan, said a person in the know.

During the CoC meeting on November 6, lenders are expected to re-evaluate their funding plan and assess whether the airline has any realistic prospects for revival. While the possibility of liquidation is not being ruled out, it would represent a challenging outcome for all parties involved, said a banking executive on the condition of anonymity.

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RBI holds meeting with large NBFCs, cautions them to avoid complacency during good times

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Governor of the Reserve Bank of India (RBI) Shaktikanta Das on Friday convened a meeting with the Managing Directors (MDs) and Chief Executive Officers (CEOs) of prominent Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) in Mumbai, cautioning them against complacency during favorable market conditions, even as he lauded their sustained growth in the recent past, as reported by CNBC-TV18.

Today’s meeting aimed to fortify the financial health and operational robustness of these entities, which collectively represent around half of the total assets within the NBFC and HFC sectors.

Present at the meeting were Deputy Governors, M Rajeshwar Rao and Swaminathan J, and the MD of the National Housing Bank (NHB), S K Hota, as well as several senior officials from the RBI. The discussion delved into several critical aspects of the NBFC and HFC landscape.

In a statement released by RBI after the meeting, the Governor applauded the NBFCs and HFCs for their marked enhancements in financial stability and operational resilience in recent times. He acknowledged the pivotal role these institutions play in extending credit to previously underserved and unbanked regions. However, the Governor cautioned against complacency during favourable market conditions, stressing the need for sustained vigilance.

A central theme of the meeting revolved around the reinforcement of governance standards and assurance mechanisms. The Governor underscored the necessity of bolstering compliance protocols, risk management practices, and internal audit procedures within these financial entities.

Among the topics addressed were strategies for diversifying funding sources for NBFCs and HFCs, aiming to reduce their overreliance on bank borrowings. The potential risks stemming from rapid credit expansion in the retail segment, particularly in unsecured lending, were also examined. Additionally, the leaders discussed the prioritization of upgrading IT systems and cybersecurity measures to preempt cyber threats.

The meeting called for strengthening of balance sheets through improved provisioning coverage. The participants emphasised the importance of monitoring stressed assets and mitigating potential slippages. Liquidity and asset-liability management were underlined as crucial components of maintaining financial stability.

Transparent and reasonable pricing of credit products, aligned with the Fair Practices Code, was another focal point of the discussion. This included a renewed commitment to a robust grievance redress mechanism that ensures consumer protection and trust.

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Go First lenders to seek individual board nods for interim funding after DGCA clearance

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The lenders of cash-strapped airline Go First have decided to proceed with interim funding for the company after the aviation regulator gave a green signal to the airline to resume operations, multiple people aware of the development told CNBC-TV18.

The airline’s lenders are now seeking individual board approvals to release interim funding for the company, said people in the know. This move comes after the Directorate General of Civil Aviation (DGCA) gave its green light for the airline to resume operations, albeit with certain conditions.

Following a crucial meeting held today, the lenders unanimously decided to proceed with the financing, signalling a ray of hope for the cash-strapped airline, CNBC-TV18 has learnt. It should be noted that the lenders had previously given an in-principle nod for approximately Rs 450 crore in interim financing for Go First, last month. However, the final decision on releasing the funds was contingent upon the DGCA’s clearance, which has now been obtained.

The interim funding assumes utmost importance for Go First as it will enable the airline to resume operations, which have been severely impacted by the economic downturn and the unprecedented challenges posed by the COVID-19 pandemic.

Sources close to the matter have indicated that a substantial portion of the financing is expected to come from two key lenders, namely Bank of Baroda and Central Bank of India. Both institutions have expressed their commitment to supporting the airline during these difficult times.

However, one notable absentee in providing further financing is Deutsche Bank, which is unlikely to extend any additional support to Go First. This development might put added pressure on other lenders and the airline’s management to secure alternative sources of funding.

Go First, formerly known as GoAir, has been grappling with financial difficulties, which led to its admission into the Insolvency and Bankruptcy Code (IBC) on May 10. The airline has outstanding debts amounting to Rs 6,521 crore, owed to various banks including Central Bank of India, Bank of Baroda, Deutsche Bank, and IDBI Bank.

GoFirst, one of the major players in the Indian aviation industry, has faced stiff competition and market challenges in recent years. The cash-strapped airline filed for bankruptcy, blaming ‘faulty’ Pratt & Whitney engines which led to the grounding of half its fleet, and revenue hit.

As part of the ongoing financial restructuring efforts, Go First had cancelled all its flights until July 23. This temporary halt in operations is aimed at minimising costs and conserving resources while the airline works towards resolving its financial woes.

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RBI’s new rule on compromise settlements with wilful defaulters faces backlash

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India’s recent move to allow lenders to settle loans of wilful defaulters under compromise settlements is facing backlash, with bank unions seeking its withdrawal and political leaders questioning the new rule.

Last week, RBI released a new framework for lenders to reach settlements with borrowers, including wilful defaulters.

“REs (regulated entities) may undertake compromise settlements or technical write-offs in respect of accounts categorised as wilful defaulters or fraud without prejudice to the criminal proceeding underway against such debtors,” the regulator briefly stated in its circular on ‘Framework for Compromise Settlements and Technical Write-offs’ released on June 8.

A compromise settlement, as per RBI, refers to any negotiated arrangement with the borrower to fully settle the claims of the lenders against the borrower in cash; it may entail some sacrifice of the amount due from the borrower on the part of the lenders with a corresponding waiver of claims of the lenders against the borrower to that extent. Or simply put, it is a compromise agreement between a borrower and lender to settle all claims upfront, which may not necessarily entail full recovery of dues.

A wilful defaulter is a borrower who refuses to repay loans despite having the capacity to pay up.

In a joint statement released on Tuesday, the All India Bank Officers’ Confederation (AIBOC) and the All India Bank Employees’ Association (AIBEA) said, “All India Bank Officers’ Confederation and All India Bank Employees Association, representing the collective voice of more than 6 lakhs bank employees, vehemently criticise the recent move by the Reserve Bank of India (RBI) to allow Banks lenders to settle loans of wit defaulters under compromise settlement.”

“We view the recently released RBI’s ‘framework for compromise settlements and technical write-offs’ as a detrimental step that may compromise the integrity of the banking system and undermine the efforts to combat wilful defaulters effectively.”

The associations said that allowing compromise settlement for accounts classified as fraud or wilful defaulters was an affront to the principles of justice and accountability. “It not only rewards unscrupulous borrowers but also sends a distressing message to honest borrowers who strive to meet their financial obligations,” the unions said in their letter.

RBI in its ‘Prudential Framework for Resolution of Stressed Assets’ (June 7, 2019), earlier said that borrowers who have committed fraud/ malfeasance/ wilful default will remain ineligible for restructuring.

However, the recent circular indicates that lenders may reach a compromise settlement with such borrowers.

“Now this sudden change in the framework by the Central Bank to grant compromise settlements to wilful defaulters came as a shocker and it will not only lead to erosion of public trust in the banking sector but also undermines the confidence of depositors. It fosters an environment where individuals and entities with the means to repay their debts choose to evade their responsibilities without facing appropriate consequences,” the unions said.

The All-India Bank Officers’ Confederation and All-India Bank Employees Association have called upon the RBI to review and withdraw its decision.

Congress general secretary Jairam Ramesh also took to social media to seek clarification from RBI on this latest decision.

“The RBI knows well the dangers of its move. Two years ago, it had clearly stated that wilful defaulters would not be allowed to access capital markets or take fresh loans. As recently as 29 May 2023, the RBI governor warned about the many ways in which defaulters and fraudsters conceal the true status of distressed loans. Will the RBI clarify if the Modi government has pressurised it to take this U-turn?” Ramesh said in his statement released on Twitter.

The RBI must clarify why it has changed it’s own rules with regards to ‘wilful defaulters’ and ‘frauds’.

This despite the All India Bank Officers’ Confederation and the All India Bank Employees Association clearly stating this move would “erode public trust in the banking… pic.twitter.com/pINsFMMn5D

— Jairam Ramesh (@Jairam_Ramesh) June 14, 2023

While the rules face stiff opposition from political leaders and unions, the banking executive CNBC-TV18 spoke to have welcomed the move. They believe it will help their recovery efforts, especially in cases where legal processes stall recovery for years at end.

“Widening the scope of prudential framework for stressed assets will also further strengthen the recovery mechanisms,” SBI’s research note said, without specifically delving into wilful defaulters.

“The proposed amendments to the stressed assets resolution circular of June 7, 2019, for including specific guidelines for compromises and settlements with borrowers, is a welcome move. This will help to expedite closure of settlement proposals under a certain regulatory framework – promising further cleansing of bank and corporate books, with a renewed focus on further credit and business growth,” Soumitra Majumdar, Partner, JSA said.

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Go First lenders to discuss interim financing for airline today

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Go First’s Committee of Creditors is scheduled to convene its first meeting on June 9, since the company was admitted to the bankruptcy court, two people in the know told CNBC-TV18.

The lenders are likely to discuss crucial matters pertaining to the airline’s future, and will focus on two to three key items, including the recommendation of a resolution professional, during the session.

The meeting will also delve into the funding requirements of the airline, as well as review the recently submitted revival plan.

Go First has sought around Rs 200 crore as interim financing from its lenders, according to two banking executives CNBC-TV18 spoke to. This will also be taken up in the meeting.

“We have to examine if more financing is viable, let us see,” one of the airline’s lenders said, on condition of anonymity.

Besides this, lenders will also look to appoint a new resolution professional for the airline, as per people quoted earlier.

The National Company Law Tribunal (NCLT) had appointed Abhilash Lal as the interim resolution professional for Go First on May 9, when it admitted the airline’s application to initiate insolvency proceedings.

Go First’s Interim Performance Report (IPR) had submitted a six-month revival plan to the Directorate General of Civil Aviation (DGCA) earlier this month. The plan highlights various strategies and initiatives aimed at restoring the airline’s operations and financial stability.

As per reports, the airline said it was ready to resume operations with its fleet of 26 operational aircraft and 400 pilots. Go First airlines has also said that it can deploy two aircraft to start Delhi-Srinagar and Delhi-Leh chartered flights immediately upon receiving approval from the aviation regulator.

The airline plans to resume scheduled services on the Pune, Bagdogra, and Goa routes. It also said it will be able to deploy eight to 10 aircraft for the scheduled services, as per reports.

The cash-strapped airline filed for bankruptcy on May 2 this year, blaming ‘faulty’ Pratt & Whitney engines that led to the grounding of half its fleet, and revenue hit. Go First has cancelled flights until June 12, as of now.

Go First, formerly known as Go Air, is burdened with a total liability of Rs 11,463 crore. Among these liabilities, bank dues account for Rs 6,521 crore, with Deutsche Bank, Bank of Baroda and IDBI Bank among key lenders.

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