AUDIT PROFESSION INDIA: CERTAIN ISSUES

The Satyam imbroglio has made several fingers pointed at the sanctity of audit reports in India. Sections 224 to 233 of Companies Act 1956 clearly set out the qualifications, appointment and certain statutory requirements to be complied with auditors of a limited company. The Act thrust upon the responsibility of professionalizing the auditing by stipulating that only a registered member of the Institute of Chartered Accountants of India is eligible to become auditors of companies. The Institute of Chartered Accountant of India (ICAI) is a statutory body incorporated under the Chartered Accountants Act, 1949. The website of ICAI shows the names of the Council who governs the Institute, takes policy decisions, controls, regulates and supervises the auditing operations in India. According to Section 224, the auditor of a company is appointed by the General Body Meeting. Hence the auditors are accountable to the shareholders of the company who constitutes the General Body.

Today’s Economic Times carried a report stating that Price Waterhouse Coopers, statutory auditors of the Satyam Computers pointed out that the audit reports of the company were not signed by their partners (See page 5 of ET). Now the following question arises:

(1) Is it not the responsibility of the auditor appointed by the General Body of a Company as per the provisions of Companies Act 1956 to inform the appointing authority about who all were authorized to conduct the audit and who all were authorized to sign the reports?

(2) The General Body appointed PwC as the statutory auditor and how can they delegate the power of audit to Lovelock and Lewes (Remember the famous maxim “Delgatus Non Protest Delgare” which a delegate cannot delegate his powers to another person).

(3) ICAI who has been empowered as the statutory body as far as accounting and auditing is concerned and Mr. S.Gopalakrishnan one among the disputed signatories of Satyam’s audit report and member of Lovelock and Lewes is a member of the ICAI’s Council. Then how this fact did not come to the notice of ICAI?

(4) In an interview with Mr. Patrick de Cambourg of Mazars (See page 11 of ET), it is stated that though the cash and bank balances are to be independently verified by auditors, often this did not happen and shortcuts were adopted due to complexity of procedures. In this era of technologically enabled banking system, the auditor can even get the username and password of all bank accounts of the company and download the latest account statements directly from the respective banks. Later on the company could change the password. Another statement was that the checking of bank accounts was typically given to the junior accountants. Does this mean that the senior auditors are not responsible for what the juniors do? Is it not the duty of the senior auditors to teach right practices to the auditors?

(5) Another critical issue is that Mr. S.Gopalakrishnan who signed the audit reports of Satyam continues to be a member of the council of ICAI who has to enquire about the audit practices at Satyam. Is it not a conflict of interest? One has to naturally doubt whether ICAI is having a soft approach to the issue because a few days back there was a remark by ICAI President that the auditors could be misled by the company management. Is ICAI trying to protect PwC or Mr.Gopalakrishnan?

(6) Given this conditions how a shareholder can trust the audit reports? The valuations of companies are done based on the audited financial statements and the latest revelation indicates that around hundred odd reports may also face this problem. We are investing in shares looking at the valuation of the company and if the valuation goes wrong our investment decisions also will go wrong. Another important aspect is that the rating agencies also depends heavily on audited financial results and in the above context the rating of instruments and institutions also can go wrong. What would be the solution for this contagious problem?

(7) Now Satyam’s officials are facing prosecution. Why the auditors also are not being booked under the law and subjected to prosecution process. Was there any unholy relationship between the audit staff and the Satyam management?

(8) A few years back in the case of Tata Finance, A.F. Fegusson withdrew its report and the senior partner of Fergusson Mr. Kaley resigned from the position. At that time ICAI had indicated that a review committee would be reviewing the audit reports on a random basis. Did this take place? If so why the Satyam’s report missed from their review process?

(9) The Minister in charge of Corporate Affairs has stated that the company officials could not escape from financial misappropriations by simply remitting the penalty. What about the auditors? Are they also not accountable?

(10) Now the capital market is dwindling and bears dominate the market. A year back, the booming market prompted many investors to put their hard earned money in equity and derivative securities as also mutual funds. Now under the current market condition, many of these investments are considerably below the preliminary investments. The two stimulus packages announced by the government could not instill confidence among investors and many of them are still shy in investing in stock market and related instruments. The confidence in corporate accounting and the audit reports have been lost. It is not that the companies are strong that the investors shy away, but it is the sentiments play high now in the stock market. What would be the measures by the government to bring back the investor confidence?

SATYAM FIASCO: IS IT A FAILURE OF CORPORTE GOVERNANCE?

Satyam Fiasco has raised several eyebrows against the credibility of corporate governance in Indian corporate entities. This is not the first time that companies promoted by family groups defraud the investors. But Satyam has a different face because the Chairman himself admitted the fraud and wrote to the Board of Directors and the Capital Market Regulator about the manipulations which have made all regulatory frameworks a mockery. The first corporate governance issue came up on account of the ‘conflict of interest’ in the case of AF Fegusson who acted as auditor and consultant to the Tata Finance Limited in which case the TFL Managing Director had committed financial manipulations which the auditor had failed to bring out. In the case of Satyam, the financial manipulations amounted to about Rs.7000 crores. These manipulations were in the form of understatement of liabilities and inflated cash balance. Satyam reported a net profit of Rs. 649 crores whereas the real profit was only Rs.61 crores. The website of the company shows that the revenue for Q2 of 2008 had gone up by 38.8 per cent and Net Profit had gone up by 42 per cent on a YoY basis. The quarterly results had been filed with stock exchanges, SEBI, and the other stakeholders in compliance with the statutory requirements. It is also stated that the audited financial statements had been prepared in compliance with the Indian GAAP, US GAAP and IFRS guidelines. While the standalone financial statement under Indian GAAP is audited by Price Waterhouse Coopers (PWC), one among world’s four leading audit firms, the other statements are unaudited. This reminds me the role of Arthur Anderson in the case of Enron where, Anderson became a party to hiding the real financial position of Enron. Consequently, the audit wing of Anderson had to be closed down.

Another interesting aspect of Styam story is that two academicians were on the Board of Satyam. They were not mere academicians, but were from two leading business schools. While Prof. Rammohan Rao was from the Hyderabad based Indian Business School, which is the leading business school in India, Prof. Krishna Paleppu was from the famous Harvard Business School. Prof. Rao also held various important positions in various bodies in India where as Prof. Paleppu is professor in Harvard and corporate governance happens to be one of his primary areas of interest. Now I am wondering how these eminent personalities failed in ensuring the implementation of the declared corporate governance practices of the company? They were considered to be independent directors, but their actions raise doubts about their independent functioning. The company’s corporate governance statement for 2007 shows that an audit committee was functioning overseeing the financial reporting and disclosure process as also the ensuring the sufficiency, correctness and credibility of the financial statements. It is also seen that Prof. Rammohan Rao was a member of the audit committee. How far the audit committee was committed to the responsibilities thrust upon them?

The statutory auditors of Satyam were PWC. With my two years experience as internal auditor of a leading commercial bank in the private sector, I fail to understand the principles of audit followed by the auditors of PWC. Normally auditors insist on a certificate of balance from the company’s bankers and the banks balance as per the balance sheet should tally with the balance as revealed by this certificate. Wherever the balance does not tally, the company has to prepare a reconciliation statement and produce before the satisfaction of the auditors. Similarly the liabilities were understated. Now the question is how the auditors were satisfied with the company’s statements. Did they blindly believe the company? Or did they physically verify documentary evidences in support of company’s claims. Mr. Ramalinga Raju’s letter to the Board reveals that the practice of inflating the profit was vogue in the company for the last several years. If this is true, how the auditors’ failed to find out this manipulation and bring this in their report? PWC owes answer to the investors because they have certified the company’s financial statements.

Satyam episode pulled down the stock market indices heavily. Sensex lost 7.25 per cent and NSE lost 6.18 per cent on a single day consequent to the revelation of financial manipulation and Ramalinga Raju’s resignation from the Board. Satyam lost over 70 per cent in the market. Now the fate of over 50,000 employees of Satyam is in doldrums. The investors who had great faith in Satyam lost heavily in this game. The clients have already expressed their reactions by blacklisting the company. Now how will compensate the investors?

I have great appreciation towards Mr. Ramalinga Raju because he was bold enough to openly admit which otherwise would have remained in the dark corridors resulting into damages at a much higher scale. I feel that Mr. Raju is not as much guilty as the independent directors and the auditors. It is unbelievable that the financial manipulations of this much magnitude went unnoticed by the colleagues of Mr. Raju. Probably, Mr. Raju may be trying to save all his colleagues by owning up the whole responsibility. By this action he has exhibited the qualities of a true leader. However, these actions do not dilute the gravity of the offence he committed and the law has to take its own course. It is high time that we should redefine the punishments to financial offences by enhancing the value of punishments so as to make it costlier to pay the penalty than compliance of rules and regulations (now it is the other way).

Incidentally, Satyam is the winner of Golden Peacock Global Award for Excellence in Corporate Governance. They had also won award for best learning centre from American Society for Training and Development and another award for Corporate Social Responsibility. I am wondering weather this is the type of corporate governance and corporate social responsibility for which awards and recognitions are being given?

While concluding, the following questions still remain in my mind:

(1) What is the value of corporate governance principles declared by the companies? As an investor how much can I believe them?
(2) What is the role of independent directors on the board of companies? How much they are accountable?
(3) What is the function of the audit committee of the Board constituted as per the corporate governance guidelines? How much they are statutorily accountable to the regulator, investors and the stakeholders?
(4) How far investors can rely on audit reports? What is the sanctity of audited financial statements?
(5) What is the role of academicians in the boards of companies? How do they justify their actions to their students whom they teach good governance and corporate ethics? Are they using their expertise for the benefit of the company?
(6) What is the role of market regulator? How are they going to protect the investors? How are they going to fix accountability with the auditors and company directors?
(7) As an investor whom can I trust now? Is it the company? Is it the independent directors? Is it the market regulator? How far my investments in equity and equity related investments are safe?
(8) What would be the penal action against Mr. Ramalinga Raju? Will it be the usual peanuts or some thing larger which would make him lose a fortune?
(9) What would be the regulatory initiative to prevent spread of this decease to other corporate entities and protect the interest of the investors?
(10) What would be the action against the auditors? Will ICAI show the courage to blacklist PWC from undertaking audit work of any corporate entities India?

MONEY SUPPLY

Money supply can be defined as the aggregate supply of money in circulation, which comprises of currency with the public and demand deposits with the banks. It is the liquid assets held by individuals and banks. Some economists consider time and savings deposits to be part of the money supply because such deposits can be managed by governmental action and are involved in aggregate economic activity. These deposits are nearly as liquid as currency and demand deposits. Other economists believe that deposits in mutual savings banks, savings and loan associations, and credit unions should be counted as part of the money supply. Money supply is also known as money stock or monetary aggregates

There are several measures for the money supply, such as M1, M2, and M3. The money supply is considered an important instrument for controlling inflation .The Reserve bank of India has adopted four concepts of measuring money supply. They are M1, M2, M3, &M4.
The measure of money stock designated by M1 is usually described as the money supply. The components of money supply are currency with the public ie notes in circulation and deposits. It is the narrow measure of money, which is used for everyday expenditure.
Another measure of the money supply is M2, which is the total of M1, savings and small time deposits, overnight repos at commercial banks, and non-institutional money market accounts. M2 is a key economic indicator used to forecast inflation. M2 is also a broad money concept.
M2, plus large time deposits, repos of maturity greater than one day at commercial banks, and institutional money market accounts constitute M3 is also known as broad money concept. This includes net time deposits (fixed deposits), savings deposits with post office savings banks and all the components of M1.

The monetary policy and credit policy addresses the control of money supply. These policies are aimed at increasing or decreasing the money supply. The Reserve Bank of India announces these policies on a half yearly basis, at the commencement of each half-year. The major tools use by the RBI to control the money supply are the bank rate, variation of reserve ratios, open market operation and moral suasion.

When RBI increases or reduces the bank rate, the funds become dearer or cheaper to banks. This either eases the market with more money supply or tightens the market by withdrawing the excess liquidity in the market. The change in the reserve ratios such as Statutory Liquidity Ratio or Cash Reserve Ratio also reduces or increases the funds availability. Statutory Liquidity Ratio represents the investments made by the banks in unencumbered securities approved by the RBI. Under open market operations, the Reserve Bank auctions the treasury bills or buys the bills back so that the excess liquidity in the market would be absorbed. Similarly the buying back of the securities will enable the banks to get funds from the market. The moral suasion is a non-monetary measure. It is psychological pressure applied on the activities of the banks, which ultimately would either withdraw or supply money to the market.

GLOBAL FINANCIAL REGULATORY AUTHORITY- WILL IT BE A SOLUTION FOR FUTURE FINANCIAL CRISIS?

History tells us about the existence of financial system in the world enabling the countries to exchange their currencies. The Bimetallism prevalent prior to 1875 gave way to the Classical Gold Standard. The World War I brought an end to the age old British dominance in the World money management. The Great Depression in 1931 called for a central regulatory system to ensure economic stability in the countries across the world. Thus the move started in 1944 by 44 countries in Brettonwoods in UK brought two Institutions to manage the global financial word. While International Monetary Fund (IMF) was expected to provide assistance to come out of Balance of Payment crisis, the sister institution International Bank for Reconstruction and Development (IBRD), popularly known as World Bank, took the responsibility of extending financial aid to build up ruined economies across the world. The lack of confidence in the British Raj in management of International Monetary System consequent to the failure of the Classical Gold Standard led to replacement of Great Britain by United States on the control. The dominance of US can be witnessed visibly in the Brettonwoods System which had thrust upon the responsibility of conversion of Dollar into Gold at a specified rate which was revised thrice. The failure of US to meet their commitment was the reason fro the failure of Brettonwoods System.

 

The 1922 Geneva Economic Conference provided the platform for giving birth to an International Banking Institution to bring co-operation among the Central Banks across he world. Thus the Bank for International Settlement (BIS) was established in 1931 with its Head Quarters in Geneva to promote central bank co-operation.

 

The Latin American Crisis and the East Asian Currency Crisis in the 1990s were ample evidence for the failure of all the above institutions in managing the International Financial System. If we closely examine the administration of these bodies, we can clearly see the US dominance everywhere. Thus the US has grown to the level of a major economic power capable of deciding the fate of the economies in the world because they are the custodian of the wealth of these economies. Though European Monetary System emerged as an alternate mechanism and Euro was positioned against US Dollars, so long as US Dollar remains as the intervention currency and the foreign exchange reserves of countries are maintained US Dollars, the economic power of US is difficult to be controlled. After dwindling for quite a long time since its inception, Euro is getting stabilized only now.

 

The current financial crisis also was triggered by the US economy. The US subprime crisis was the root cause for the meltdowns of banking institutions and loss of jobs, homes and security for millions in the world. Still they continue to be the custodian of the wealth of economies in the world. Now a new demand has emerged out of the discussion among the world economists for constitution of a Global Financial Regulatory Authority. Prof. Joseph Stiglz while delivering the Lakdwala Speech in New Delhi had put forward this suggestion as a solution to check future meltdowns. At the same time he had criticized the economic policies of US administration and had squarely blamed them for the present crisis.

 

If we examine the role of IMF, World Bank and BIS in preventing a meltdown as that happened in the previous years, we have to accept the fact that these institutions have miserably failed in preventing a crisis. I feel that they were silent spectators of the crashing of markets. The reasons, I feel, could be the US dominance.

 

Now it is not clear what would be the shape of a new regulatory authority. Can the US hands be kept out of this agency? If US dominates this one also will it not be another institution like IMF or World Bank? Being the holder of the major portion of the wealth of nations how can one keep away US from the proposed authority? In my opinion, the countries have to shift their reserve currency from US Dollars to Euro and use Euro as the intervention currency in order to prevent future financial crisis. With weak banking system and lack of control mechanism US can create more havocs in the world financial markets. Unless US is kept out of the scene no new authority can effectively prevent future meltdowns.

GLOBAL FINANCIAL CRISIS AND INDIAN ECONOMY

Financial Crisis is not a new phenomenon in the modern world. The major financial crisis which brought down the economies of Latin American countries such as Brazil, Mexico was the first experience in the modern era. The IMF and US administration lifted these economies through an expensive bail out plan. The second experience was from the East Asian Financial Crisis triggered by the devaluation of Thai Bhat in July 1997. The crisis pulled down eight South East Asian Countries commonly known as Asian Tigers. The countries were Malaysia, Singapore, Hong Kong, Taiwan, Korea, Indonesia, Philippines and Thailand. The melt down drastically brought down not only the stock and currency markets in these countries but the markets in other developing countries such as USA, Japan etc. were also affected on account of the contagious effect. Fortunately Indian economy was spared from a major crash thanks to the conservative approach our administrators had taken with regard to opening up of our economy to the external world as also the insulation mechanism implemented by sterilizing the cash flows from abroad. But the current crisis emanated from the US sub-prime lending became costly to Indian investors as well due to the steep fall of stock prices and weakening of Indian Rupee.

Indian money market was experiencing severe liquidity crunch on account of the heavy FII out flows consequent to the financial crisis abroad. However, we were quick in reacting by initiating appropriate qualitative as well as quantitative measures to arrest the steep fall and rebuild the lost confidence. Reserve Bank of India pumped around Rs.125000 crores to the market in three tranches by reducing the SLR, CRR and Repo rates considerably. The worst affected areas were real estate and SME sectors due to the reluctance of bankers to lend. The RBI initiative enabled the banks to reduce their lending rates by 75 bp and many banks declared lowering their lending rates, especially to home loan sector. The relaxation in the norms for Participatory Notes was another initiative to boost up FII inflows. Another noteworthy initiative was the increase in foreign investments to 49 per cent from the current threshold limit of 26 per cent for investments in insurance sector. On the qualitative side the Finance Minister and Prime Minister assured the country that our banks and markets were safe and the phenomenon was only temporary. Besides RBI on its part assured liquidity to the banking system and certified the safety of Indian Banks. These measures could ease the tension to a great extend and the market started rebounding as witnessed by the upward journey of stock indices and strengthening of Indian Rupee against dollars. The quarterly results of India Inc. also indicate growth potentials.

However, the buoyancy does not last when we look at the employment sector. Globally, the companies have started downsizing consequent to the financial crisis in order to reduce their cost of operations. The Indian counterparts, especially IT companies and BPOs have to follow the path because their business would come down drastically on account of the slow down in overseas economies. The major part of outsourcing is from US and the bad shape of US economy has already spread black shadow on the IT companies. While large companies like Infosys are trying to avoid a huge downsizing, smaller one has no option and hence started retrenchment. The Prime Minister had appealed the industry captains not to retrench their employees consequent to the meltdown; the Indian branches of overseas companies have already started dropping the employees. Recently American Express showed the doors to their employees in India. The loss of employment may create financial and psychological problems to a large population in the country unless they are suitably redeployed.

These events need not melt down our confidence; at the same time we should not be complacent also. The BRIC report has identified India as one of the major economy in the world by 2050. The phenomenon what we now witness is only temporary. The managers of our economy are not simple politicians but they are able and eminent economists and business executives who are capable of envisioning eventualities and initiate timely corrective measures. Though the industrial production has slowed down now, it will rebound in the ensuing financial year. The agriculture production also is showing positive trend and as such the economy will regain its lost momentum with in a short span of time. The inflation is expected to come down to 7 per cent by February next. The crude prices are falling and are expected to touch $55 per barrel. If the trend continues, we may expect a further decline in inflation to 5 per cent by 2010. The employment opportunities will also go up by the above period. The capital market is expected to perform in a better manner because of the lowering of interest on bank deposits and availability of more funds from banks. However, the ensuing election to the Parliament may bring new political equations which can greatly influence the future progress of the country. Let us hope that the economic agenda of the country will not be disturbed by the election process and change of administration.

FINANCIAL EXCLUSION

Financial exclusion can be defined as the process of denying access to financial services to a section of the population. Financial exclusion has become a major concern of many of the countries. A study conducted by Elaine Kempson and Claire Whyley of the Personal Finance Centre, U.K revealed that one and a half million households lack even the most basic financial products and another 4.4 million are on the margins of financial services provision. Various reasons have been assigned for financial exclusion. Some of these reasons are:
Lack of awareness of financial products and services among the households
Lack of sufficient income by the households to save.
Unemployment among the households or underemployment
Young householders who are yet to take decision on availing of financial services
Elderly persons above the age of 70 who depend more on cash
Denial of access to the financial services due to the stringent conditions imposed by agencies providing these services.
Low savings or no savings
Lack of assets
Poor financial habits resulting into indiscriminate spending.
Psychological disabilities
Feeling of being outcast form the mainstream of financial services
Indigenous and ethnical issues
Geographical inconvenience
Lack of time
Computer illiteracy or lack of PC/internet access
Availability of alternate products and services.
Alternate suppliers providing services.

The other phenomena related to financial exclusion are financial illiteracy, financial exploitation and financial discrimination. Financial illiteracy is experienced not only in the rural sector but in some sections of the urban population also, especially among the newly employed youth class. By financial illiteracy we mean the lack of adequate knowledge on of financial services and products, their uses, scope and potentiality. The second phenomena, financial exploitation is the result of either non-availability of organized form of financial services sector or people shy away from the organized sector. There are still people who deposit money in unregistered financial institutions and lose their hard earned savings forever. Another area of concern is the tight grip of loan sharks over the farmers and small businessmen. Many times these people hesitate to go to the organized sector in view of the cumbersome procedures or number of formalities to be observed providing opportunities to unorganized sector to exploit the poor and down trodden. The third one financial discrimination happens when a certain class of customers enjoys privileges when the others are denied of such facilities. whereas in some other cases they proceed with recovery action. In view of these reasons also many times people hesitate to avail of the financial services.

Generally the poor, socially underprivileged, disabled, elderly men, children, women, uneducated, ethnic minorities, unemployed etc. class of people are subjected to financial exclusion.


Financial exclusion imposes significant costs to individuals, their wider neighbourhood and the society at large. Some of the important costs associated with financial exclusion to individuals are higher charges for basic financial transactions and credit, no access to certain products or services, lack of security in holding and storing money, barriers to employment, entrenching exclusion

Financial exclusion brings costs to the society as a whole. Some of the costs to the society are contributor to child poverty, costs to the benefit system, link to social exclusion.

REAL ESTATE FINANCE-IS IT ANOTHER BUBBLE?

The banks have started rethinking about their exposures in real estate. Punjab National Bank has already frozen their loans to real estate. The global melt down in the financial markets consequent to the sub-prime lending fiasco in the US market has sent lightning through the spine of bankers. No doubt the bubble is taking its shape to burst unless further growth is prevented. The lessons from East Asian Countries are good evidences of real estate meltdowns consequent to financial market crisis. It would be interesting to take a journey through the risky territories of this high profile high return credit portfolio of banks.

Traditionally, real estate finance has been a lucrative area not only to commercial bankers but even for the indigenous bankers and village money lenders. During olden days farmers used to mortgage their land with the Zamindars by simply handing over the title deeds and signing a promissory note. The passing of Transfer of Properties Act, 1882 gave a legal frame work for transfer of properties and prevented illegal transfers. The Act extensively covers mortgages, leases and exchanges. Sections 58 to 104 of the Act well explain the legal requirements to make a mortgage effective. Chapters I and II of the act also deal with the requirements to be complied with for making the transfer of properties effective. A bank which extends real estate finance against the security of landed property usually ensures that all these legal requirements are complied with prior to sanctioning the loans. Still the banks run into various risks while financing the real estate sector.

One of the major risks is the legal risk. The legal risk arise out of the non-enforceability of the documents executed by the borrower. This situation may arise due to various reasons such as lack of proper title, non-compliance of legal formalities, inadequate stamp duty, incompetency of the owners to mortgage, restrictive covenants in the document of title to property etc. Banks do exercise vigilance against the legal risk by getting the documents scrutinized by the bank’s legal counsel and further scrutiny by the banks’ own legal officers. Despite all these precautions there are numerous instances where the borrowers could defraud the banks. In some cases even the documents presented happened to be fake which were made with the connivance of the officials of the Registration Department. One of the precautionary measures which banks take is by obtaining non-encumbrance certificate from the Registration Department. If the loan is taken against a registered mortgage, the non-encumbrance certificate will show the details of mortgages. But the mortgage by deposit of title deeds will never appear in the non-encumbrance certificate issued by the registration department. Though the original documents are held by the bank which financed the loan, the borrower manages to get another copy with the help of the officials in the registration department and produce this document before another bank for raising loans. (In Tamil Nadu, a few years ago even the Registrar was a party to such fraud. In Kerala a number of fake Pattayams issued by the revenue officials were confiscated during a raid conduct by the government last year.) When the documents are proven to be fraudulent, the financing bank loses the chance of exercising its right over the property.

Another case of legal risk is certain restrictive covenants in the original document. For example in a Partition Deed, there may be clause preventing the alienation of certain part of the property which is set apart for a specific purpose. But in subsequent documentation this portion may be conveniently omitted without producing the original Partition Deed stating that the original held by another family member and producing a certified copy. The certified copy is provided by the Registration Department and with the connivance of the Department Staff any manipulation could be done. Similarly there could be minor’s right. Section 20 of Transfer of Property Act provides certain benefits to an unborn child which is in the mother’s womb. If the documents are manipulated, the opinion provided by the legal counsel may go wrong. Generally 30 years chain of documents is normally examined by the legal counsel. But in certain cases dilution is permitted by banks, which can turn to be risky on a later date.

Now the major exposures of banks are against builders. The flat culture has given birth to a number of builders who constructs flats and sell to those who are in need. Initially, the constructions were done according to demand. This culture has now been changed to building flats and selling to those who are in need which necessitated extensive marketing of the villas and flats. Many of these firms have tied up with celebrities to market their product by paying hefty sum as remuneration for playing the role as brand ambassadors. There are also firms which sponsors realty shows by offering exorbitant prizes. All these costs are loaded to the flats and villas making them much costly and common man may not be able to afford them. Consequently, the market narrows down and the income generation slows down. On the other hand these groups acquire more land and continue constructions by borrowing from banks and taking advances from prospective buyers. There are many instances where builders vanished from the scene with the money they collected from the prospective buyers, leaving the project half way resulting into default of the loans taken from banks. Often, the whereabouts of these people may not be known as either they cross the boarders of the country or live in anonymity elsewhere. While the large fishes survive the strong current, small fishes quickly vanishes from the scene taking with them the hard-earned money of poor people. Unless banks take urgent measures to prevent the unbridled expansion of building activities at the cost of funds borrowed from them, another bubble may burst soon.

Another class of borrowers who have availed loans for purchasing houses/flats is the employees and salaried class. The boom in the IT and financial sector during the last few years really pushed the earnings of employees to five or six figures. Even fresh graduates from technical institutions and business schools are absorbed by multinationals by offering exorbitant pay and fringe benefits. Take for example the salary offered by the bankrupt investment banker Lehman Brothers to IIM graduates. The reports show that they had offered as high as Rs.18 lakhs per annum. An ISB student was absorbed by another consulting firm by offering more than Rs.1 crore per annum. Now consequent to the meltdown in the financial markets, the MNCs have started downsizing operations. The report shows that HSBC is planning to lay off around 1100 employees. Lehman’s Indian operations have around 2000 employees and all of them have been served with termination letters (www.indianexpress.com, 17.092008). Considering the lay off by Merrill Lynch, Morgan Stanley, Washington Mutual Funds together with that by the IT and ITES firms and BPOs, the number of outgoing employees at different levels would be substantial. A majority of them might have availed of housing loans from banks and financial institutions. Considering the fat pay they were receiving from their previous employers, their exposure in the housing loan may be substantially high. Consequently, they may find it difficult to pay back the funds borrowed, even if a substitute employment is offered to them because in the current market condition no firm can afford to pay such hefty amount as pay and perks. Hence banks have to expect severe repayment problems from this class unless they have already securitized these loans.

The liquidity in the market is highly affected by the meltdowns. Consequently, the disposable funds with investors have come down substantially. The market may experience severe resource crunch and the banks may have to with draw from lending to certain sectors. Many of the realtors have started their expansion process and would now find it difficult to scale down. India’s largest realtor DLF is said to be in the process of raising $750 million through their associate company DLF Asset from JP Morgan. They had loan exposures with DE Shaw and Lehman. DLF may afford this but what about the smaller ones? Many of them will find it continue their building activity since the borrowing cost may go up and it would become uneconomical them to sell the flats/villas at the already agreed prizes. Consequently many of them may leave the scene ending up with losses to the lenders and clients.

Now what can be done the best? Firstly, the banks and financial institutions should persuade the builders to sell the flats as quick as possible. Secondly, instead of stalling the whole construction activities they may finance the building activities in a selective manner. Thirdly, banks may enforce their title at the earliest in the case of properties which are mortgaged to them and where they find that the borrowers have dropped the project. This step will enable the banks to save the interest cost