At a time when small-scale industries (SSIs) are being given ‘priority treatment’, many units continue to be left at the mercy of callous and grasping banks. One such unit, Infinite Metals, is being systematically dismantled by its banker under the umbrella of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, and despite its desperate cries for help, regulators and authorities continue to turn a blind eye. The Act empowers banks and financial institutions to recover their non-performing assets (NPAs) without the intervention of the Court, through various methods.
The case of Infinite Metals shows how SARFAESI’s draconian powers are misused by banks against small companies. Infinite Metals is a small-scale export-oriented unit (EOU) which is facing a daily battle for survival as its lender, Corporation Bank, is unfairly utilising the provisions of the SARFAESI Act to force the otherwise healthy unit into sickness.
The Bank has been resorting to various strategies to recover its claimed dues. The unit alleges that Corporation Bank wrongfully classified its account as an NPA, when there were no overdue amounts. Its accounts were immediately frozen following this classification, which prevented the unit from access to working capital. It states that in order to justify the NPA classification, the Bank has been cooking up the amounts and due dates in various submissions to the Reserve Bank of India (RBI) and the Banking Ombudsman (BO). The Bank apparently also failed to give due notice of the account becoming an NPA before enforcing the SARFAESI Act on the borrower. The Bank also blatantly refused to make any efforts towards restructuring the unit’s debt and helping it get back on its feet.
Following such harassment, Infinite Metals filed a complaint with the BO to get justice and protection. The BO, after a detailed investigation and written and oral submission from both parties, finally concluded that there was indeed a deficiency in service on the part of the Bank on all points mentioned in the complaint. However, a year later, the BO unceremoniously closed the case on the grounds of lack of adequate documentary evidence and failed to issue a decisive order.
Emboldened by this move, Corporation Bank promptly stepped up its harassment and threatened to sell the unit’s residential property under the SARFAESI Act. The Bank finally succeeded in arm-twisting the unit into selling its property, for which the unit had to pay a capital gains tax. It has also lodged a recovery suit at the debt recovery tribunal (DRT). This is despite the fact that the unit has paid the Bank 100% of its principal dues. Corporation Bank is now choking the unit into paying up the inflated principal and outstanding interest.
Harish Bhatia, director of Infinite Metals, points out how the Bank has refused to follow RBI guidelines. “Corporation Bank has wrongfully invoked the SARFAESI Act within three months of NPA classification. It has not followed any RBI guidelines in this matter. Despite accepting the fact that no dues were outstanding, the Bank has gone ahead and invoked SARFAESI. Also, when the credit facilities were guaranteed by Export Credit Guarantee Corporation of India Ltd (ECGC), what was the legal reason for the Bank to come on us so hard? The BO’s decision to drop our case is simply baffling. In my belief, it is a clear case of corruption and malafide intention on the part of the Bank.”
When contacted by Moneylife, an official from Corporation Bank claimed that the Bank has followed RBI’s guidelines on the SARFAESI Act and that it is yet to receive 100% of its dues. “Bank classification of NPA is nothing to do with the ECGC’s claims. They have their own way of settling things. It could have taken a long time for them to actually conclude investigations and settle the claim.”
When asked why the Bank did not attempt to restructure the unit’s debt, the official said, “The company should have initiated a definite proposal for restructuring if it so wished.”
The BO’s failure in providing justice to the unit has now left it at the mercy of the lender. Continued harassment at the hands of the Bank will only drive the unit further into financial losses, ultimately leading to its closure. The unit’s appeal to the RBI against the BO’s decision has been referred back to Corporation Bank. However, no reply has been forthcoming from the Bank and hence, the appeal is held up. In this scenario, the SSI unit now appears to have nowhere to turn to. It certainly cannot expect to get justice from the civil courts, where various cases have been pending for ages.
Ironically, an RBI survey itself points out that only 4% of sick SSI units are viable. “Has anyone tried to check how many of these sick units are a case of bank-induced sickness? Are 96% of our SSI brethren such dumb entrepreneurs,” asks Harish Bhatia.
The fact is that many such small businesses are being subjected to torture and harassment at the hands of bankers with selfish interests. While it is very easy for bigger companies to have their way with the banks and the judiciary, small businesses with no clout always end up on the losing side. — Sucheta Dalal with Sanket Dhanorkar
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