Secured Lending - Protecting The Banks Security Interest: Fill & Download for Free

Punjab and Maharashtra Cooperative (PMC) Bank is on the verge of bankruptcy, and as such RBI stepped in to stop people from withdrawing money in order to prevent a bank-run situation that could be a disaster.Let’s understand this properly.What happened to the bank?A bank’s business model is simple: they receive money from savings and deposits made by ordinary people, and then invest that money by giving loans to businesses. If, however, the loans turn bad, then the money is at risk. In order to control this, RBI mandates all banks to undergo two things:Detailed audit, wherein a qualified auditor looks at all their advances and reports whether the loans are likely to turn bad or not.Make a provision for loans that are likely to turn bad (known as non-performing advances or NPAs).In the case of PMC, the NPAs increased.But isn’t the provision made precisely for this situation?Yes, it’s true. Whenever the NPAs increase, the bank uses the provision that it had already created. However, that is only when the increase in NPA is within the range of what you’d call normal. In the case of PMC, two issues stand out:In their recent financial statements, they did not show the correct picture of NPAs. In other words, they deliberately showed bad loans as good loans when the picture was different. PMC Bank's bad debts had increased from Rs 148 crore to Rs 315 crore in FY19The problem should have been detected well in advance, which is why we have audits in the first place. However, poor mismanagement led to this issue and it was discovered only when it was too late. PMC Bank: Depositors Pay for Poor Supervision, Dubious ManagementSo why did RBI stop people from withdrawing money?Consider this: suppose you saved all your money in HDFC Bank. One fine day you read in the newspaper that HDFC Bank is on the verge of bankruptcy. What is your first thought? Your first thought is to withdraw all your money as soon as possible before the bank becomes bankrupt.Naturally. But the problem is that everyone thinks the same. And so everyone would want to withdraw their money at the same time. Obviously the bank will not have so much cash at any given point in time because they would have given loans to people. So if everyone turns up, they would run out of money and that would only make them bankrupt even faster than it otherwise would have.This is known as bank-run effect. So in case RBI thinks that any bank is likely to go bankrupt, it stops people from withdrawing money because if it allowed all people to withdraw money, then it would definitely become bankrupt.Does that mean innocent people’s savings are at risk?Yes. But the DICGC rules state that all deposits to the extent of ₹1 lakh are insured, which means that is the amount that people would get in case the bank goes bankrupt. So everyone whose deposit is less than ₹1 lakh will get their entire money, and others will get at least ₹1 lakh out of their money.Additionally, at the stage, efforts would be on to prevent bankruptcy from even happening in the first place by securing as much money as possible from the bad loans given by PMC Bank. But there is little hope.Why is it difficult to recover the money?Firstly, this case seems to be deliberately planned. A big portion of the bank’s money was lent to real estate sector, and majorly to Housing Development and Infrastructure Ltd. (HDIL) led by Rakesh Wadhawan.[1]The problem is that PMC Bank continued to lend money to HDIL even after they defaulted on their loan repayment schedule. This is where it stops being mismanagement and starts becoming gross negligence, or worse, corruption. This is a problem with India’s banking sector.Is there a problem in banking sector?The answer is definitely yes. NPAs have been on the rise for several years now, peaking at 11%+ in 2018.However, NPAs are expected to come down at around 8% by end of this year. Gross NPAs of banks may come down to 8% by March 2020. Nevertheless, the problem is severe, and it was the major reason why legislation was introduced last year by way of the FRDI bill.I had explained the FRDI provisions in detail during a Quora session last year. Some of the answers you might find useful for understanding the banking sector and the possible solutions to the problem are presented here:Can you elaborate the reasons for the introduction of the FRDI Bill, and what positive and negative impacts will come with this bill?Has the government gone out of options to prevent the collapse of the banking industry? Would this bill actually protect the interests of the depositors or is it just a cover-up to get it passed?What is the difference between bail-in and bail-out clause? Will bail-in be a threat to depositors' money?So what is happening at the PMC Bank now?The RBI had stopped people from withdrawing any amount exceeding ₹1000 from any PMC Bank account. However, today itself the withdrawal limit was increased to ₹10000. RBI increases withdrawal limit from Rs 1,000 to Rs 10,000 for PMC Bank customers"The above relaxation has been granted with a view to reducing the hardship of the depositors. The Reserve Bank is closely monitoring the position and shall continue to take further steps as are necessary to safeguard the interest of the depositors of the bank," RBI said.Rising NPAs are a problem, especially because the system isn’t robust enough to handle genuine cases from fake ones. For example, businesses not being able to generate money due to bad economic conditions is still understandable, but continuing to lend money to defaulters is beyond acceptable.Over malfeasance and corruption in the NPA problem, Raghuram Rajan had said, "Undoubtedly, there was some, but it is hard to tell banker exuberance, incompetence, and corruption apart"."Clearly, bankers were overconfident and probably did too little due diligence for some of these loans. Many did no independent analysis, and placed excessive reliance on SBI Caps and IDBI to do the necessary due diligence. Such outsourcing of analysis is a weakness in the system, and multiplies the possibilities for undue influence”Over-optimistic bankers, growth slowdown responsible for NPAs: Raghuram RajanRajan’s comments are not proof, but his analysis points to an underlying problem in the system. In the present situation, when the economy is going through a slowdown, it becomes important to continue the flow of money in the economy. This is why checks and balances are compromised while lending money, thereby increasing the chances of bad debts.Apart from the general problem in banking sector, the problem seems to be specifically exacerbated in case of cooperative banks. These cooperative banks (including PMC) were initially only formed for local communities.Over time, though, these banks have started operating in various other sectors covering both urban and rural areas. However, their management has not been able to catch up with the corporate practices generally implemented in other banks, leaving these banks vulnerable to malpractices.RBI has been keeping close tab on many cooperative banks. PMC fiasco: How the RBI has been nudging cooperative banks to become more professionalSourceBeware of rumours. Although PMC is a rather smaller bank, but such fears in the banking industry should be watched closely, because any rumour could have a negative impact on other banks as well as they also start having bank-run effects. RBI rejects social media rumours about closure of 9 commercial banksI’ll update this answer as more facts emerge on this case.Footnotes[1] Explained: Why RBI has put restrictions on PMC bank, what happens now

This is the case of Police v Beal, heard in the Magistrates Court at Maroochydore in Queensland, Australia in about 2001.Along the coast road from where Beal lived is a cove with a beautiful beach which is about 250 metres long. People go there for nude sunbaking. One of the people was Mr Beal.At about that time, the Premier of Queensland decided to grab a couple of votes by cracking down on nude sunbaking, so he ordered Queensland’s finest to be let loose. They threw themselves at the job.As a result, Mr Beal was arrested in his birthday suit and charged with indecent exposure. I knew him vaguely. He phoned me and asked whether is was a criminal offence. I told him it was, so he retained me.Now, Mr Beal was a civil engineer. Although he was an Australian, he had spent most of his career designing and building freeways and the like in Colorado and Arizona. He was meticulous. So, off he went and surveyed the whole beach from the southern to the northern headland and drew a detailed plan of the locus in quo, showing where he was, where a couple of other people were, and where the police had first appeared around the rocks on the southern headland.Mr Beal was about 100 metres north of the rocks.One other thing. Mr Beal had a copious head of black hair and over-sized sideburns. The lower end of each sideburn was gray - maybe one or two centimetres (1/2 to 1 inch for the Americans).We turned up in court. There were two police witnesses. Their witness statements were a joke - one was a cut and paste of the other with the names and pronouns changed appropriately to protect the guilty. As you will see, the statements were also stupid.The young cop testified that when he and the old cop came around the rocks, he had seen Mr Beal stark bollicking naked, standing on the beach.So I cross-examine him.Me: You said you identified my client from the rocks.Cop: Yes.Me (Almost certain what he was going to say): You couldn’t identify him from there, could you?Cop: Of course I could. My eyesight is excellent.Me: OK. describe to the court the man you saw.Cop (I knew he would): He was tall with black hair and grey sideburns. There he is sitting beside you.Me (Got the lying bastard): Could you see his genitals.Cop: Of course.Me: Tell the court, was he circumcised or not?The Magistrate nearly fell off the bench laughing.Mr Beal was acquitted on a point of law - there has to be something sexual associated with public nudity to make it indecent behaviour.Most trials are a tragedy, one way or another, but even tragedies have amusing moments.I remember another trial that I reported back in 1996 as part of my entry requirements for the Bar. The judgment is on the web at www.queenslandjudgments.com,au. The case was Donely and Donely v Donely and Others.For present purposes, what happened was that Justin Donely owned some farming land, but he was holding it on trust under his father-in-law’s will for the benefit of his two small sons, called at the trial “the boys.” Justin wanted to buy some more land and equipment for himself, but he didn’t have the necessary cash, nor any available collateral.Nothing like that ever stopped a crook. Justin went to the local branch of the National Australia Bank, borrowed the money and gave the bank security for the loan in the form of a mortgage over the boys’ land. The crucial point for this story is that the bank manager knew that Justin was holding the land in trust for his infant sons, but took the mortgage anyway.Needless to say, it all blew up and the bank sold the boys’ land.Years passed and the boys turned 21, which, in those days, meant they could sue in their own names. They were majorly pinged off at Justin, so they did.They retained solicitors who took the job on a speculative basis - no win, no fee - and those solicitors retained my good friend Tony Morris QC to appear on the same basis.During the trial, Tony was cross-examining the bank’s regional manager about its lending practices. He had contrived to get the banker excessively defensive. The guy was trying to work out which questions were trick questions and which weren’t - which is an excessively stupid thing to do.Anyway, Tony put it to this turkey that, of course, the bank loaned money to farmers so it could earn interest.Blow me down if the banker didn’t answer with a straight face, “No. The bank doesn’t care about interest. It’s more concerned with helping the farmers.”Paul de Jersey, the judge, couldn’t keep a straight face and I nearly wet myself laughing. The bank settled that afternoon.But wait! There’s more.Justice de Jersey’s daughter was his Associate. At the risk of drawing the ire of those pofaces in the #metoo movement, I can say that she was exceptionally beautiful.One of the boys thought so because the next morning after the bank blew itself up, the judge announced that one of them had called his chambers to ask if he could take his daughter to dinner. The judge was concerned that maybe he should recuse himself because he might be said to be biased.Everyone thought it was a great joke, but nothing more, so the trial continued and the boys won.Sorry about the long answer, but I feel particularly happy today. I had the second of my two cataracts removed yesterday and the world seems bright and clean and wonderful again.

Remember the 2008 Financial Crisis?The thing that went off like a 50-megaton nuclear bomb in the USA and soon spread to pretty much the whole world? How do you think that happened?To say a very long and complex story short, the banks in the USA got greedy. And filthy rich. All at the expense of middle-class Americans.After the Federal Reserve (analogous to India’s RBI) reduced interest rates considerably post 9/11 to calm some very tense nerves, the banks began lending loans, primarily housing loans to everyone and anyone they could come across. This meant that people who had no sure footed jobs or enough incomes to sustain a decades long debt repayment process were all handed over housing loans like candy. There was a boom in the US housing market and at the same time the number of bad loans in the banking system steadily crept on.To offset this and fool potential investors, the banks began packaging bad loans with other good loans and sold it as an overall valuable investment to those who were buying it. And yes, they made more money off of it.Well, all fun things have a tipping point and somewhere at the end of 2007, the bad loans in the system breached a critical level and triggered the whole collapse of the US financial market as we know today. Banks and insurance companies like the Lehman Brothers, Bear Stearns, Merrill Lynch, AIG, Freddie Mac, Fannie Mae, HBOS, Royal Bank of Scotland, Bradford & Bingley, Fortis all either went bankrupt or began selling their assets in emergency sales at very low prices.Approximately 1.3 million people lost their jobs and thousands were evicted from their homes.[1] But the big shots, the CEOs and top ranking executives of these institutions walked home with millions and millions of dollars in payouts and exit packages. Not a whole lot of them were punished in this whole breakdown which was in reality, completely manufactured and done on purpose with absolute knowledge about the eventualities. Luckily for Bush, it was the end of his term. Unluckily for Obama, his Presidency began with the worst financial crisis in human history.You must be wondering where the hell was the Federal Reserve and how did they not see this coming. Well, they did see this coming.This guy Alan Greenspan served as the Chairman of the Federal Reserve for 19 years until 2006 and when he was asked about whether his organisation ever saw the crisis coming, he simply said it did but it “wasn’t his job to point it out” and that the “Fed had the capacity to crack down on the bubble, but it would've compromised economic growth”, which roughly translates to “I wasn’t gonna spoil the fun”. [2]In essence, Greenspan who was a true bred capitalist at heart and an intellectual protégé of that selfish proponent of objectivism named Ayn Rand, believed in the American ideal of ‘minimum government interference in private concerns’.In fact, if you don’t know, Raghuram Rajan, our RBI’s ex-Governor had predicted the Crisis way back in 2005 when he delivered a paper in Wyoming to a panel full of notable economists with the chief guest being *wait for the answer* Alan Greenspan! Rajan argued that though the housing market was rising up exponentially, it was also getting riskier in the process. The result? He was laughed out of the room. Greenspan scoffed at this and former US Secretary of Treasury (literally USA’s Finance Minister) Larry Summers who was also on the panel that day called Rajan “misguided” and soon Rajan was the anti-change, anti-market Luddite.[3]Three years laterComing to India in the same timeframe, not a single bank would hand you a housing loan or any loan for that matter unless you had the required securities and a good source of income to show that you can repay it.The RBI is an obsessive regulator of Indian banks and almost works on the principle that if bankers were given the opportunity to sin, they would sin. Like the USA’s housing market boom, there was a similar real estate boom in India and the first thing the RBI did was to ban banks from handing out loans for purchase of raw lands. When the RBI saw American banks hiding their debt by packaging them in off-balance sheet vehicles, it essentially banned that practice in India. The RBI saw potential cataclysms in the future and thus also pushed interest rates up by 20% which reduced all the drummed up housing loan excitement here. It also made banks secure extra capital for the loans they made. [4]Y.V. Reddy was the RBI Governor during all those years and he literally and figuratively, was the anti-Alan Greenspan.This, needless to say, pissed off Indian banks a great deal because they were looking at their American counterparts getting richer and richer while they were missing out on everything. They whined and they cried about it, the same way banks in the US would have had Greenspan shown some balls to do what was necessary.But in the end what transpired?When the 2008 Crisis hit, NOT A SINGLE BANK in India, neither private nor nationalised, came remotely close to collapsing like so many others in the USA and Europe. None of them needed to be bailed out by the government with atrocious sums of money paid for by the taxpayers and nowhere did we lose anything near the vicinity of 1.3 million jobs.Yes, we had repercussions and bankers and economic experts today in India will forever hold a grudge against those gluttonous, ravenous CEOs and policy makers in the USA who caused those repercussions. One of our major, current banking predicaments, the twin balance sheet problem (also called the NPA problem), has some antecedents in the 2008 Crisis which reduced growth rates world over and turned some of the banks’ investments into bad loans.But, had there been no RBI to regulate our banks as was the case in the USA, trust me, India would have been in a deep, deep mess. A mess from which it perhaps would never have come back alive. We as a developing nation of poor people could never have survived such a catastrophe like the rich, western nations did.Meanwhile in the USA, after all the brouhaha had somewhat settled, their Congress passed the Dodd–Frank law aimed at regulating Wall Street and ensuring some measure of consumer protection to the citizens. Not that it was a very effective law. It was, at best, an eye wash to cool flaring tempers and hurt souls. And it survived for exactly eight years as the Trump administration recently began the process of rolling back a lot of the major provisions in the law and introducing a new, even more lenient law to control Wall Street’s unchecked gluttony.[5] The irony here is that Trump won the election by literally screaming out his lungs that he will dismantle Dodd-Frank if he ever became President. The American people literally elected their own destruction into office.[6]Such is the state of banking in the USA. Sure, this is just one aspect of it and there may be many other areas in which their banking system is better than ours. I am by no means an expert in banking or economics, I am at best a novice, but I personally believe that if private banks are not regulated because the government adheres to the failed policy of laissez-faire, expecting things to regulate itself, such tragedies will continue to happen.Such stringent regulations in the banking sector may never be welcome in the USA. That would be borderline communism to them. But such regulations are imperative in the interest of maintaining a stable economy. And a banking environment that cannot survive is pretty much useless even if it is better in other aspects.For this and this reason alone, I believe banking in India is way better than banking in the USA. You sleep with the knowledge that the RBI takes necessary steps and corrective measures to ensure your money is safe.Cheers! :)Edit: Since a lot of the comments mention this, I feel obliged to include it in the answer too. The list of movies to watch for laymen to understand the 2008 Crisis.Inside Job (our guy Raghuram Rajan features in this)Too Big to Fail (docu about what Fed Chairman Bernanke and US govt did to contain the crisis)The Big Short (multi-starrer, also a book by the same name)Margin Call (a movie from the perspective of a bank involved in the Crisis)I have watched the last three and they are tremendously useful and more knowledge giving than any book or articles you’ll ever read.Footnotes[1] 1.3m people have lost their jobs in the recession, finds report[2] Greenspan: Not My Fault[3] When Raghuram Rajan predicted the 2009 US financial crisis - Times of India[4] Avoiding a Financial Collapse, Indian-Style[5] House passes sweeping legislation to roll back banking rules[6] Donald Trump Says He Would Dismantle Dodd-Frank Wall Street Regulation