Wednesday, December 26, 2012


Our last instalment had ended with the resolution “we propose to write on how close we could allow the client to get to us at a personal level.” However after we discussed the issues with two young friends and with the analyst who had mooted the topic in the first place, we decided that this could be well sorted out individually. In fact the writer was already feeling something of a psychiatric counsellor in the role. Yes, it is an important practical ‘conceptual’ issue, but obviously the ‘subjectivity index’ is rather high. We’ll run a re-check on another date. Time we turned to something technical.

There is a very significant issue which has always exercised the minds of many. It is the unreality or artificiality of ‘Financials’ especially in the Indian scenario. You find this subject commonly discussed in the chapter called “Limitations of the Balance Sheet” or something. The Chapter usually talks about aberrations in Valuation, Intangibles, Subjectivity and ‘inclusion only of elements which can but be assessed in terms of money’.  But then books all over the world blame the same factors, whereas as any analyst will vouch, the figures are more fictitious in India than anywhere else. In fact, many Annual Reports deserve to be kept under ‘Fiction’ and not under ‘Business’ in the Library. Hence, if it is to be of practical use, the discussion should be in the Indian context.

As a credit analyst, the major factor for the unreliability of published financials we can cite is sheer ‘Hypocrisy’ amongst sections of our great Civilisation. All those who matter indulge in tax evasion, or filing inflated Export Incentive claims, or angling for undeserved Subsidies or a host of other things on which several major and respectable professions in India thrive.

We have attended many a Consortium meeting, where the members, particularly of a Bank the name of which begins with an ‘A’, and in the past used to begin with a ‘U’, ask innumerable theoretical questions. There is something to be said for their touching faith in the Written Word, or there being so wedded to, or being so keyed up of the theoretical aspects of Ratio Analysis. Problem here is that the querying analyst is exposed as a ‘theoretical’ person, a greenhorn with little practical experience in his blood, and someone who will be contented with a theoretical nostrum and can be lulled with Theory, which is what the ‘consultant’ wants in order to have unreasonable demands cleared.

Any expert engaging in the analytical part of credit appraisal strongly protests, when one mentions the sheer futility of endless discussions on current ratio or CRR or the other, and many will say “ if we cannot rely upon these statements which were handed over to us by our Gurus, what do we analyse then?”, how can anyone say “financial analysis is futile”? Try telling this to an analyst at CRISIL or Moody’s. Our answer is that most analysts will rarely handle listed and highly regulated entities, following Corporate Governance, such as BHEL or Tata Steel or MMTC. For the usual analyst, the playing field will rarely be ‘level’.

Even then, so far as the units we contend with are concerned, we grant it, or can again unequivocally affirm the utility of the study, and acknowledge the importance of these figures. The only problem according to the writer is the way the statements are to be studied and interpreted, the angles of looking, so to say, and the importance of reading between the lines. These are lessons we have learned after years of disappointment and handling the machinations of the pimps of the Indian Financial World, namely the ‘Consultants’! Many of these people can’t differentiate between an asset and a liability! Sure, they cannot be wished away!

To illustrate the mistaken assertions the analyst frequently makes, exposing their ignorance of the peculiar Indian circumstances, here is a hilarious exchange (we swear it really happened):

We were attending the Consortium meeting for assessing the new ABF (Assessed Bank Finance) of LDPL, a leading diamond company, a DTC sight-holder, and obviously a Kathiawari. ABF was around Rs. 500 crore. In diamond, the limits tend to be roughly half of projected sales. The promoter VBG, whose name is a household name in Surat, number of rotaries and gardens named after him for pecuniary reasons, was attending the meeting- that’s one meeting the promoter invariably attends. One banker friend roared: “Mr. G....., why has your current ratio fallen from 1.35 to 1.28 as the end of so-and-so?” Furious, VBG glowered at his Director Finance who is paid ten times the banker, and said “ what is this chap saying, do you understand? The “what-he-says”- (turning to the dealing officer-kitna (kiman) hona apko saab, is less good or more?) should be more than 1.35 by tomorrow, otherwise considered yourself fired!”

More on Current Ratio:

M/s PCL was a major manufacturer of Roto Water Tanks in what is now Chhatisgarh- they are what we loosely call ‘sintex’ tanks. The promoter was NS, an IITian, topping the degree with a PGDM from IIM Ahmedabad. Their working capital enhancement proposal was rejected because their current ratio as at the end of the past FY was less 1.33. In response NS just laughed and said something to the effect- “Sir, I can pull on with the same limits, but you must seriously reconsider this 1.33 fetish, it will cost you’ll lose clients! Now Sir tell me- during the past year- have I once approached for overdrawing, or was my account ever irregular due to LC devolvement, or did you find my liquidity strained? I’ll bet, if anyone manages to show the ratio as 1.33, you’d ignore all symptoms of strained liquidity in the actual account, if any.”

The lessons from the above are:

(i)         The current ratio figure has to be read in conjunction with other events in the actual bank account over the recent past.

(ii)        The current or CC account statement of account is more important than the number crunching. It can throw up all kinds of surprises- irregularities, suspicious round sum payments and receipts, cheque returns etc. etc.- the proof of the pudding is the statement of accounts- do collate all of them in case of multiple banking. A senior banker calls it the ‘Janam Patri’, i.e., the horoscope of the unit.

(iii)      What matters is not just the figure of the ratio, but also the quality of the asset, as well as proper classification of the assets. Take the example of Mafia- whatever the period or circumstances- all receivables are current asset- recoverable at the drop of a hat! Do read the book ‘Freakonomics’ by Steven D. Levitt and Stephen J. Dubner, which likens the management procedures of the Mafia to those of any major American Corporate!

(iv)     So far as classification is concerned, the definition should not be rooted in ‘time-period’. The correct definition is that the asset should form part of the working cycle of the unit. Thus, a ship, in the books of the dock building the same, will be classified as a CA even if the realisation of expenses takes 2 years. If realisation of a 2 month old debt is doubtful, we’ll treat as outside current asset. An example about inventory was one YE of Shillong- they procured cheap tablet cell-phones from China, good quality but economical cost-wise, and just then HCL launched the excellent HCL ME tablet costing Rs. 14,000/-. Imagine the ‘currency’ of the new Chinese stock! In general, any techno-intensive industry deserves to be looked at very closely from the angle of obsolescence. You know how they reap the prices and dump them in free fall. In fact facilities to these high risk-high return businesses are usually treated as clean, and the collateral factor counts for more, than the current ratio. The common-sense about security in India- primary security is less sacrosanct than collateral, because primary security is in the custody of the borrower, whereas the collateral security is in the custody of the lender! You can have endless discussions about validity of a title, what the bania believes is- kabja sachha, baaki jhoot- possession is everything, forget the paper work!

(v)          Striking off an equivalent sum from both the numerator and denominator – CA and CL- boosts the current ratio. (for example removing bills discounted from limit availed and receivables, as is commonly done, enhances the ratio.)If CA= 210 and CL= 201, the current ratio is 1.05, and deducting 200 both from numerator and denominator, it becomes 10! Therefore please do remember to factor in all the CAs and CLs.

(vi)        Some theoretical misconceptions:

    • The remark in many appraisals: the NWC has gone down as the sundry creditors have shot up: remember NWC= CA-CL is a non-causative identity, while NWC is ‘the amount of long term fund that goes into funding of CAs’. So, the changes in CA and CL will not affect NWC, it’s independent of CA and CL, being a part of long term funding. Please think into this- it’s very important.
    • The higher the current ratio, the better: the current ratio of a defunct unit always shows an increasing trend as both numerator and denominator go down as the business is winding up.
    • How important is the arithmetical figure as at the end of the year: the current ratio in the closing balance sheet is less important than the situation on the ground you have to watch, physically inspecting the unit. You’ll know more about the current ratio from a mere look at the unit itself.

We return to the same topic next week, taking up the net profit/ production ratio, how it is to be handled in the Indian circumstances. That’s another very interesting topic which we reserve for now!

(your queries may be addressed to do name your institution)


Sunday, December 16, 2012


The title of today's entry is taken from an article by the indomitable Late JBS Haldane (d. 01.12.1964), the brilliant Englishman who was more Indian at heart than anybody else. He chose India as his home for the outrageous liberties we offer... Check him up on Google please! His views are in the nature of a classic- universally applicable to all areas of human endeavour. Today we move away from accountancy and credit [we'll return next week-please see (*) below] and take a critical look at something more cerebral- the issue of the size of a financial organisation- question is- how much water does 'Bigger the Better' hold? Question we would like to ask of Management Experts is : what is this obsession with size man...? Down-size, up-size, right-size, wrong-size, re-size…? The larger, the better- bigger fetish? Are we megalomaniacs….? Mind you, these views are personal and do not claim to trace their lineage to any established Management School, assuming they exist.But our views do have a pedigree, as we stated, and certainly deserve respect, and have to be taken into account by young people who are going to lead the Country's business environment in the years to come !

Being FIs and bankers, let’s talk about them. There is a Bank with a loan + investment book of 1000 crores, with deposits 950 crore, and capital, 50. There is a loaning opportunity of 500 crore, and the Bank raises deposits of corresponding amount. Forget SLR-VESLR. Has the Bank become 1.5 times the earlier size? Manpower remains the same.

Build larger Banks, they say. Will a gaggle of ten banks together, with a business of 100 crores each, and capital adequacy ratio (capital funds to asset ratio, in general terms) of 10%, be smaller, that is will the gaggle be smaller than an entity formed by their absolute merger? Sum of parts less than the whole- can you be sure?

That neat little nursery rhyme sums it all:

If all the seas were one sea, What a great sea that would be!
If all the trees were one tree,What a great tree that would be!
If all the axes were one axe,What a great axe that would be!
If all the men were one man,What a great man he would be!
And if the great man took the great axe,And cut down the great tree,
And let it fall into the great sea,What a great splish-splash that would be!
Remember a Bank called Lehman Brothers? An Investment Bank called Barings? An energy major called Enron? Big daddies all. Huwe naamwar benishaan kaise kaiise..?

Abraham Lincoln had ‘inordinately’ long legs. i.e., high leg/torso ratio, say around 2:1! A press reporter is bent upon embarrassing old Abe. How long should one’s legs be, President, he asks. The reply is –just enough to reach the ground! That’s what the size of an organization do- reach the ground! Not stay in the air!

We recommend you read that classic “On Being the Right Size” by JBS Haldane.

Of course, “Being the Right Size” does not refer to Firms or Banks as such , but like all classic,as I said, its applicability is universal. Here Haldane points out some possible handicaps of size.

Let us take the most obvious of possible cases, and consider a giant man sixty feet high-about the height of Giant Pope and Giant Pagan in the illustrated Pilgrim's Progress of my childhood. These monsters were not only ten Times as high as Christian, but ten times as wide and ten times as thick, so that their total weight was a thousand times his, or about eighty to ninety tons. Unfortunately the cross-sections of their bones were only a hundred times those of Christian, so that every square inch of giant bone had to support ten times the weight borne by 1 square inch of human bone. As the human thigh-bone breaks under about ten times the human weight, Pope and Pagan would have broken their thighs every time they took a step. This was doubtless why they were sitting down in the picture I remember. But it lessens one's respect for Christian and Jack the Giant Killer.

To turn to zoology, suppose that a gazelle, a graceful little creature with long thin legs, is to become large; it will break its bones unless it does one of two things. It may make its legs short and thick, like the rhinoceros, so that every pound of weight has still about the same area of bone to support it. Or it can compress its body and stretch out its legs obliquely to gain stability, like the giraffe. I mention these two beasts because they happen to belong to the same order as the gazelle, and both are quite successful mechanically, being remarkably fast runners.

To return to organisations, naturally various factors will affect the performance of a ‘system’. Why mechanically relate it to size? Size could be, in cases, the sole dispenser and arbiter, for instance, in the case of a collapsing star or nuclear fission. The latter is simpler to understand. The core of a fission based atom bomb would most likely be Plutonium or Uranium 235. Atoms of both the elements have a peculiarity, a propensity to lose neutrons. When a neutron gets released from the atomic orbit, it may either (i) pass through the inter-atomic spaces and escape from the mass, or (ii) it may hit an atom’s core and in billiard fashion, trigger off further exodus- the so-called ‘chain-reaction’. Supposing we start from Plutonium the size of a marble, probably the neutrons will mostly leak out. If one adds more and more Plutonium to the marble, as if enlarging a plasticine ball, a stage comes when the neutrons get internally trapped and then the mass is ripe for the explosion. This ripe mass is called the ‘critical mass’. In practice, the same effect is achieved using a TNT implosion to bring together small bits of the element together resulting in a critical mass.

Fortunately or unfortunately, organizational effectiveness is not a sole function of size or mass. Incidentally, some experts liken the chain-reaction to the communication process in an organization. Below a critical mass, the message tends to ‘leak out’. In a larger organization, the neutrons may get lost, if the radioactivity is not high enough.

Size impacts the organisation but the strength of this factor would also depend upon social culture, geography, communication, social diversity etc. etc. of both the firm and its environment. What applies in the West need not automatically be applicable to us, ipso facto. For example, in the case of the Indian provinces, smaller states within which linguistic or cultural uniformity prevails, are seen to be more effective and successful. Hence the tendency for our Indian States to get smaller and smaller, and more efficient. A large organisation, say a bank patterned on the Indian polity, would be an organisation with a number of autonomous units in it, with only some functions with the Head Office. It would be more or less like the ‘Holding Company Model’ RBI roots for. RBI officials feel that too large a bank will be a systemic risk-like placing all eggs in one basket.

So, apart from size, there will be other factors, and the impact of size could be difficult to isolate. But keeping other factors constant (ceteris paribus) the impact of size could broadly be possibly as under:

Eₒ= K*x-[x²] ©

Where Eₒ= organizational effectiveness

x stands for size

K is a constant.

© indicates that the formula is the copyright of The formula does not profess to be a mathematical model, does not claim to have any use (as x does not have any unit and is simply an orphan) and is strictly a case of groping in the dark or good clean fun depending on whether or not you hate PJs. Formula simply says that upto a point, the size may be an asset, and beyond, the deluge, !

If K =100, the graphical representation is as under:
 (On the x axis is size.)

The idea that with higher capital a bank can court bigger exposures and tap huge opportunity may cut both ways. It assumes that the efficiencies of the bank and its staff are scalable- they will go up proportionately with size, or may be exponentially. Human greed being what it is, a larger bank may spread a bigger contagion and require bigger bail-outs as happened in the US. The largest banks fell prey to ‘Sub-prime Crisis’ which, had it been committed by a junior Branch Manager would have been called ‘stupid’ and the episode would not have been couched in sexy words like 'sub-prime'. We have now anointed the term.

There is lot of literature on the net, questioning and critiquing the size fetish, some of it on top websites. The following excerpts are taken from an article by Robert G. Wilmers, Chairman and CEO, M&T Bank Corp. (MTB) writing on Bloomberg’s:

Community Banks have given way to big banks and excessive industry concentration; profits are increasingly driven by risky trading; leverage is taking precedence over prudent lending; compensation is out of control. This toxic combination leads to continued taxpayer risk and threatens long- term U.S. prosperity.

To understand the change, first consider history. Banking once was a community-based enterprise, relying on local knowledge to guide the process of gathering customer deposits and extending credit. Done well, this arrangement ensures that deposits are deployed into a diversified pool of investments, while providing depositors with liquidity and a return on their savings.

Over the past generation, however, the financial services industry changed dramatically. In 1990, the six largest financial institutions accounted for 9 percent of all U.S. domestic deposits. As of Dec. 31, 2010, the six biggest banks accounted for 36 percent of deposits.

Such concentration raises the concern that poor decisions at such outsized institutions can lead to systemic risk.

Management Consultants will always be enamoured of size. The votaries of large banks are powerful, and one strongly suspect, they represent interests of Merchant Bankers and the Bull lobbies, whose business it is to raise capital and render greedy retail investors bankrupt time to time. One longs for the day when greed is replaced by sense and Merchant Bankers and investors shift their preference to small and savvy banks, and not go after size.

STATUTORY WARNING: The views articulated above are sensible, but do not reflect the views of any organisation; they are personal, but are shared by lot of world literature like 'Small is Beautiful' by Schumacher.

(*)friends: next we propose to write on how close we could allow the client to get to us at a personal level.

Sunday, December 9, 2012


The writer joined the business of banking in 1979 when most of us were not born of course… He stumbled into Credit by default. We had an Industrial Estate branch in a city known for small and medium scale industry, mainly textile and steel related. There were thousands of working capital limits awaiting annual ‘renewal’ due to some branch management issues. Thanks to a round of musical chairs in the HR section, we landed at the branch for clearing up the arrears and the label of  ‘Credit’ stuck to us for good. The last commercial bank branch we headed had a fund based credit portfolio of around Rs. 13,000 crores and non-fund based limits of even amount. Those are the credentials.
The first human issue that confronted us as a dealing officer in 1980 was phobia of business people. We were from a ‘service-class background’. Nobody in our family had a business, and our parents were both in the teaching profession. In fact we were always taught that you study hard, you get a good job, else you have to do ‘business’. On the top of that, we had studied Science, and had no inkling of the subject of Commerce or Company Law. So whenever our branch manager summoned us to meet a businessman, our mouth would run dry. The primary fear was like this: this man has been in business for such a long time, and we know nothing about business, so how are we to assess or appraise his proposals and his business needs. We couldn’t afford to reveal our ignorance, for that would mean conceding his or her demands. Would he sort of ‘prevail’ upon us? How would we do justice to the fiduciary responsibility that our role demanded? It is now alleged that the author is a consummate credit person, and whether it is correct or not, the learning our stints generated was quite useful and it affected not only our appraisal skills, but also broadened our perspective and the way we looked at the world. We developed sympathy for the business of business. Now our elder son has a small but excellent business and we have supposedly rendered him advice that has always stood him is good stead. 
The precious ‘learning’ we imbibed, and upon which we shall try to elaborate below, is
(i)           There are businesses and businesses. But over a period of time, the credit analyst is in a unique position to grasp the common threads, and apply the common sense to judge any situation.
(ii)           The credit analyst, when he is new to the role, should realise that the knowledge the client has about his business is distinct from the knowledge that the analyst needs in order to protect the interest of his organisation, or his own interests. This should be made clear to the client also. Once he is equipped with his part of the mental software, he can hold his fort. Then of course to an extent it will also depend upon your own personality. But you have to be prepared to abandon you shyness if any, if you are to do justice to your Job.
(iii)          The businessman’s world, his compulsions are quite different from those of people hailing from the salaried middle class. We bet anybody will behave in identical fashion if born on the ‘other’ side of the fence. They are good people, we can assure you!
Let us start with papers. Once you are thorough and confident about your part of the paperwork, the borrower or the client can be told about the difference in concerns in so many words, and then he will respect you and, hopefully, seek your advice (loosely we refer to the other party as ‘borrower’, but he is an ‘applicant’ till his loan is released- no, not ‘supplicant’!).
Lot of learning comes by observing the best persons in the line. We recall an experience, when we were relatively new to the field, and RVJ, our expert from the technical cell came to assess the needs of a steel unit that was in some kind of trouble, and the interest was not getting serviced. RVJ happens to be an engineer in the technical cell, and the position is not subject to periodic transfer in the name of CVC requirements or statutory requirements of job rotation. Thus he had the opportunity to observe hundreds of units over a couple of decades, and being a curious, inquisitive and extremely capable officer, made the best of the opportunity. Analytical skills of course came to him from his study of engineering.
The unit was a steel rolling mill, manufacturing mild steel rods, angles, channels etc., mainly for use in construction. As you know, these are low tech industries, and the process is basically like making doughnuts or jalebis or murukku, you know? Passing molten stuff through holes of different shapes, and after a while the material solidifies. Technology being rudimentary, and the plant being relatively easy and cheap to assemble, there are few entry barriers. Construction demand is universal, so markets are usually available, except maybe when the commodities cycle is adverse, or there is a recession in capital goods. Margins being low, the units thrive on unscrupulousness, and unscrupulousness can be said to be a basic raw-material. As the process is quick, lots of stolen steel finds its way into the industry. There is a whole industry in a state which decency prevents us from naming, but we can give a ‘hint’- it’s a 5 letter word, starting with B and ending with R! They pilfer rails from railway and industrial yards, which are usually part of defunct rail networks, and once they are converted into rods, the evidence of theft is naturally lost, not even God can catch the theft. Then there is power theft, fake VAT claims, and naturally suppressing sales figures, for the buyer of rods usually pays cash, in India that is. We have always been wary of financing rolling mills due to the regulatory hazard, and the propensity for ‘number 2 sales’.
So RVJ came to our branch to examine one ‘A’ Rolling Mills, which was a partnership concern, in the month of August. The audited statements were not yet ready and the provisional ones showed a capital of Rs. 10.00 lacs or so, Unsecured Loans (‘quasi-equity’) of around a crore, and sales around Rs. 5.00 crores. The Cash Credit limit was around a crore and the borrower had applied for a term loan of Rs. 3.00 crores, as they planned to foray into structurals like rails, what they call ‘mota maal’ in Marwari parlance. Now we are referring to point (ii) made above: the timing of audit and contents of the statements reflected the needs of the businessman. As a novice we would not have appreciated the point, but RVJ launched into a full-scale attack on the promoter, and his weapon was what we called the ‘other’ side’s, that is the lender’s concerns about ‘financials’. He said something like this:
 “You people will never learn…still your financials are not audited and you have called me here…whaaat is this?? With one and half crore working funds, you have sales of Rs. 5.00 crores only- one rotation in three months…bah..nobody can believe that.! Your sale is actually at least Rs. 15.00 crore, it’s a rolling mill nooo.??...and that is the root cause of your audits being so late. The CAs first do the clean work..look at TNPL- audits over by 15th April! You want the CA to release all bogus vouchers and things like that to save on tax and to show your own money as Unsecured Loans by buying this entry and that entry etc. etc. etc., and that’s why the audits get delayed, then you change the auditor who is averse to these things…look you have changed you auditor twice in the last 5 years…I don’t appreciate that etc.etc.etc. Sethji, mend your ways if you want to enter the big league, this year I warn you our bank will not tolerate this .05% net profit, it should at least be 2%. You have to do that if you have to survive in the changing world, and our Bank will never like to finance people who are not prepared for the future…you’ll be extinct in no time and we’ll lose our money…etc.etc.etc.
So this the second part of point no (ii)- RVJ made known the lender’s position on the same financials which we normally accept believing that the owner knows the best and write inane, pedestrian comments like ‘the debt-equity ratio becomes satisfactory if we treat the Unsecured Loans at par with equity…’ isn’t it?  In the present case, the promoter hastily called the CA and told him to ‘show’ more profit. We could almost hear his head thinking “…saala, some kharcha has to be made to get this bloody loan sanctioned..okay, some fee we’ll pay to the Bank and some tax we’ll pay to the Government, that we’ll treat as kharcha for getting the sanctions, and I hope this man will not demand much..!”  RVJ is squeaky clean, by the way…
Having learnt this nice lesson from RVJ,  we always find is a good point to make, to let such a borrower know you mean business.
Then you have to know the difference between the financial statements the auditor produces, and the ones the FIs or Banks use. Here again the differences reflect differing concerns. The CA-produced financials are in the Company Act format, which reflects the requirements of Law, share-holders, tax authorities, etc., whereas the CMA formats reflect the concerns of the WC lender, whose attention is focussed on projected sales, the quantum of current assets required for achieving that, and what part of the current assts should be financed by the lender, keeping in view the quality with regard to liquidity. Thus you will find the heads with greater permanency at the top in the CA produced balance sheet, and in the CMA format, the other way round. Also, current liabilities cannot be netted out of current assets if the liquidity is assessed by the bank, and hence that is another point of difference. Likewise, bills purchased by the Bank/others have to be added back on both sides of the balance sheet. Often the CA’s balance sheet will show this figure under ‘contingent liabilities’. Note that deducting an identical amount both from the current assets and current liabilities will boost the current ratio. Then, the CMA format will enable you to readily compute the ‘net inventory’ in case of manufacture, as this figure is required from the point of view of the ‘matching concept’, for without making adjustment for the net inventory, ratio analysis on the P & L cannot be carried out. Finally there is the question what is a current asset and what is not. In the case of the working capital lender, more than the duration, what matters is whether or not it is a part of the working cycle- a ship may for example may require two years to build, but for the shipyard, it’s still a current asset. There could be more differences, we leave the technical part to you.
Whew…that’s a lot for one instalment we suppose. Once you are able to master the CMA and appreciate that the bread of the FI/Bank and that of the borrower is buttered on different sides, you can make it plain to the borrower or client. You’ll emerge a more confident credit analyst thereafter, and in a better position to negotiate.
The above dissertation may appear a bit crude or desi, sorry, but you can’t afford to appear too sophisticated in the Indian business world, or for that matter in any business world, ask Vikram Pandit…!
We plan to write about point (i) and (iii) later this week. Till then happy lending! A few friends have suggested we write with some regularity, so that they know when to expect the next edition. We shall try to make it a Sunday affair.
Why do people always begin an official letter with  “ with reference to your letter such-and-such, we have to advise that…”? That’s what you are actually doing, advising!Beating about the bush! Reminds us of Basanti in Sholay “ youn humen befazool bolney ki aadat to hai nahi par dekhna yeh hai key etc. etc. etc. “Just cut those words out, and look how nice and direct it looks. Come straight to the point…

Wednesday, November 28, 2012


In our initial blogs we have cautioned our readers against curiamphobia, that is the fear of Courts, driving home the point with Case references from the Honourable High Courts and the Supreme Court. But there are many angles to the relationship between the Credit Analyst and the Rules (ya-‘of the game’ if you are the Sportsy type!) A fundamental belief which has already been put forth by us on an earlier occasion is that Credit and the Legal are at best distant cousins, far from being brethren. The following exchange we had a few days back with a senior officer we were interviewing for the post of Credit Processing Cell head is illustrative of the malady. In the capacity of the CPC head, he would be in charge of all loan proposals of Rs. 10.00 crores and above, not an amount to be sneezed at.
The question we posed was like this: In the states of the North East, save may be Tripura, normally an industrial unit should have a local entity as a co-owner in some manner, and rightly so. A Company ABC Ltd. is proposed under the Companies Act, under which the local partner is setting up a state of the art hospital in association with a well known specialized group from the mainland. The share capital the local person is inducting is in the form of land worth Rs. 5.00 crore. Now, as things stand today, property registration is on hold in the state. Can the land, which is at the moment non-transferable, be so inducted, tell me..? Without batting a eyelid, our friend said “I’ll forward the file for legal examination..”. Zero out of Hundred, my friend, we exclaimed. The issue is not a TP Act issue at all. If a non-transferred property exists in the books of a Company, the Auditors are required merely to make a mention of the absence of transfer in the Notes, but the property can be inducted as share capital. In short it’s a legal issue for the promoter, but not for the Company, which as we all know, is a separate entity. So, don’t rush for the Law Officer’s cover at the drop of a hat, we all know what hemmers and hawers the tribe is, and what bleak view the legal fraternity holds about itself is evident from the last entry of our good old blog….

Secondly, what’s a legal opinion? For most analysts it’s like operating a vending machine- drop in a coin, and lo…out it comes! No my friends, it’s not so simple. Now tell us…in the state of Meghalaya, can agricultural land be mortgaged to a lender for non-agricultural purposes? No, goes common wisdom, for its not so in maybe Assam. We had the issue legally examined. How..? First we went through the Meghalaya Statute ourselves. It turned out that there is no distinct land use defined anywhere- ‘land’ is just ‘land’ – not ‘residential’, ‘agricultural’ or ‘industrial’ and it can be charged for any purpose. So progressive. Keep things simple, we are told by the best brains.  Armed with the two Bare Acts, we went to our Senior Counsel, showed her the works, and by evening we had in hand an opinion conforming to our research, and it surprised the most seasoned top bureaucrats of the Government!

Now for the thing we started with- the practical side of Analyst vis-à-vis Rules, or we’ll broaden it to Public Sector FI executive vis-a-vis Rules.

Broadly, you will be confronted with two types of Rules- External and Internal. By external rules we mean Law, be it the IT Act, Companies Act, Anti Money Laundering legislation, the CrPC, the DRT Act, etc. etc. Internal Laws, those which are Internal to your institution or your department, or your person, could be written or un-written. They are the Circulars, the Manuals, why, even your Morals, the Ten Commandments…Important thing is, a violation of the first set could end in Prosecution and worse, whereas the violation of the second set could lead to service related issues, you know what. Thus not acting on an Income Tax attachment order could lead to State vs. You, whereas overstaying your sanctioned leave would earn you at the most a memo. So, it’s best to pause and think when you are considering transgressing a rule- you are jumping a red light if the rule is external, but merely annoying your Mom or Spouse if you momentarily turn you head to appreciate a beautiful face while riding a bike!

On the other hand, look at the liberal interpretation of Law as illustrated in our previous Posts. The institution may not lose in the Court relying upon the Case Law, but you could be in trouble over the violation of internal procedure and rules. For instance, a material credit into a loan account by a borrower revives the debt for purposes of the Limitation Act, but if you Institution’s rules say that the officials should obtain a Balance Confirmation every 6 months, you could be questioned for violating the internal rules.

Time for a vow: this is becoming a legal blog it seems. So in our next entry, we shall talk about money…the business of lending…


A -who else?- blonde goes for an interview for the post of financial executive. What do you think eminently qualifies you to become a Finance Executive?...asks the Boss. “Wellllll….I’ve always loved to handle money you know… says the lady!

Tuesday, November 27, 2012


At a recent talk we gave at the premier financial institution of North East India, we had occasion to mention some legal 'believe it or not 'facts. One that turned a few heads was 'Genuine Mistake of Counsel'.

It was our legal mentor TVS Rao who brought to our notice this interesting phenomenon. That a genuine mistake of a brother legal practitioner is looked upon by the top Courts with indulgence. The case TVSR mentioned was about time-barred debt, but we could not get that reference. But here is another interesting one in which the Supreme Court reinstates a time-barred Insurance Claim on ground of mistake of counsel:

The case is Concord of Indian Insurance Companies Ltd. vs Nirmala Devi and Others decided by the Supreme Court on 16.04.1979. The Accident Claims Tribunal had pronounced its verdict on 15th September 1976 and appeal , if any, had to be preferred by 19th January 1977 but the filing was delayed by 30 days, due to a mistake by the petitioners' counsel, in computing the date of limitation. The petitioners had made two prayers, one for restitution of the case and second, for the quantum of compensation.

The High Court had earlier held that a lawyer's ignorance was no ground for condonation of delay. The matter ultimately reached the Supreme Court, and the Honourable Court held that a legal advice honestly sought and actually given without any malafide intent or element of recklessness was ground for condonation of delay. Quoting another judgement, the SC said

" The law is settled that mistake of counsel may in certain circumstances be taken into account in condoning delay although there is no general proposition that mistake of counsel is by itself always a sufficient ground. It is always the question whether the mistake was bonafide or merely a device to cover an ulterior purpose such laches on part of the litigant or an attempt to save limitation in an underhand way.

"I am of the view that legal advice given by a member of the legal profession can go wrong even as pronouncements on the question of law by Courts sometimes go err is human and lay men such as litigants are, may legitimately lean on expert counsel.."

For my credit analyst friends, the lesson is that for a bonafide mistake in any field, be it law or commerce, there is always succor from senior practitioners and senior colleagues. A blow against 'staff accountability'. Amen...

Friday, November 23, 2012


The latest Guru we adopted and acknowledged is Arindam, so far as our writing habits are concerned. He's a colleague at Chabiwala Bank, and it happened while we were chatting over cabbages and Kings. It is alleged that there is an elusive thing called 'credit expertise' in Indian Banking, and worse, it is rumored that the writer possesses it in some measure. Start a page on Facebook, Arindam suggested, where you would share your views with us. But then Junior felt it had better be a blog  for better accessibility, and so this re-incarnation

1.33 is the figure the tribe swears by, a sort of holy badge or emblem and so the page was christened accordingly, the Fahrenheit prefixed on the analogy of Michael Moore's excellent documentary, for 1.33 alone looked bald.

We don't plan to emulate the King of Hearts from Alice in Wonderland ("Begin at the beginning,", the King said, very gravely, "and go on till you come to the end: then stop”). At the top of our mind is the Legal angle currently. How much does Law have to do with Credit? Basically to the extent it concerns contractual obligations of the Bank and the Borrower. Of course the Laws concerning recovery,like SARFAESI and the DRT mechanism also get a lot of attention. But we'd stick out our neck and assert that the intimacy of the connection is over-estimated, which happens because normally, to begin with, the Dealing Officer is a stranger both to Credit as well as to Law. One has frequently seen instances where Credit has indiscriminately made over matters to Law Department, on the slightest hint of a legal angle. For instance, the guarantor to a Cash Credit loan, alas, dies. The branch seeks guidance from the Controller as to what steps are required. There are legal angles, albeit of routine nature, but the file is commonly handed over to Law. The account, if of a moderate size, falls due for renewal, which is not done by anybody pending compliance of the legal requirements, and an otherwise good account, in due course, becomes an NPA and a good business run by good people falls a prey to the ignorance of the a distinction between the legal angle, and the commercial angle. The RBI requirement of a renewal should have been clearly distinguished and kept divorced from the legal side and a renewal or a continuation approved so as to allow to the business to run unhampered.

Fortunately in our DO days we had the good fortune of working with two excellent Law Officers. The moment a letter reached their hands, they would sniff it -whether it was a legal matter or an administrative matter, and if the latter were the case, throw back the file at you and castigate you for not knowing the difference. In the above-said hypothetical case, they wouldn't have touched the issue with a barge-pole. You'd have been told that these were very common issues on which the Bank had a host of circular instructions, which you should take the trouble of going through before rushing to us.

Well, we have picked up some Case Law on common misconceptions on legal matters, which always cause lot of inconvenience to Bank and Borrowers. (The issues are not connected to the above 'renewal' issue, mind you.)

1. A mortgage is not invalid in the absence of a 'Mutation'. We quote two High Court Judgements:

The first case is about the impact of a Mutation on a Title to a property and the Allahabad HC deals a judgement contrary to the view of the Lower Court:

" ...the Lower Court.. has been swayed away by the so called mutation in the revenue record in favor of Inder Kaur. Mutation of a property in the revenue record does not create or extinguish title nor has it any presumptive value on title. It only enables the person in whose favor mutation is ordered to pay the land revenue in question. The learned Additional District Judge was wholly in error in coming to a conclusion that mutation in favor of Inder Kaur conveys title in her favor. This erroneous conclusion has vitiated the entire judgment."

(Second Appeal No. 759 of 2009. Decided On: 24.05.2011-
Appellants: Nagar Palika Parishad Vs. Respondent: Zakir Hasan and Ors.)

Second case is of a similar nature wherein the Karnataka HC maintains the validity of an EM conflicting with Mutation in Revenue records:

"It is to be borne in mind that every revenue record maintained for whatever purposes cannot be treated as record of right. There are certain revenue records, which are maintained in the usual course of administration under the governmental orders issued from time to time. Such records are not maintained under any relevant provision of law. The entries made therein may not be after making necessary enquiry with due notice to the persons who are likely to be affected by the entries made in such revenue records. That a distinction is to be made between the revenue records which are maintained by the administration with reference to statutory enactments and such records, which are maintained under administrative instructions issued from time to time by the State and its agencies. For instance, every record of right prepared and maintained under the provisions of the A.P. Rights in Land and Pattadar Pass Books Act, 1971 shall be presumed to be true until the contrary is proved and until it is otherwise amended in accordance with the provisions of the Act. Every owner, pattadar etc., may apply for issue of passbook and the title deed and the title deed so issued duly certified by the competent authority shall be the title deed in respect of an owner/pattadar and it shall have the same evidentiary value with regard to the title for the purpose of creation of equitable mortgage under the provisions of the Transfer of Property Act, 1882 as a document registered..."

(Regular First Appeal No. 560 of 1987-Decided On: 21.04.1993
Appellants:State Bank of Mysore Vs. Respondent: M/s. S.M. Essence Distilleries Pvt. Ltd. and others)

'Evidentiary Value' has another interesting side-light. It is a common misconception that a valid EM cannot be created on basis of copies of documents. As we always tell our people, when an EM is created by the title holder, he or she creates charge on the property, and not on a set of papers, which have only an 'evidentiary value.'

(Statutory Warning: this dissertation does not purport merely to be 'the views of the author', but boldly asserts possession of Legal authenticity and rectitude... -to be continued...)