Private sector lenders have turned down the finance ministry’s proposal that banks form a group and enter into a joint lending agreement for corporate loans of more than Rs 150 crore. According to the proposal, in case a loan becomes non-performing for one bank, all the member banks of the consortium would classify the loan as a non-performing asset (NPA).
The ministry had asked the Indian Banks’ Association (IBA) to discuss the issue with all member banks — private, foreign and public sector ones — and come up with a common document for joint lending.
According to bankers involved in the discussions, private banks have declined to sign any such agreement, as they are uncomfortable with the NPA proposal.
Of late, in a number of cases, asset classification of a loan differed between banks within a consortium. For instance, loans to Kingfisher Airlines became NPAs for banks like State Bank of India, Bank of Baroda and Punjab National Bank. However, the account remained standard for ICICI Bank and a few public sector banks.
ICICI Bank eventually sold its entire exposure to the airline (Rs 430 crore) to Srei Venture capital, a Srei Infrastructure Finance group company.
Bankers said the uniform asset classification proposal would lead to legal complications. Also, Reserve Bank of India (RBI) norms had to be changed to implement the proposal, they added. “If the loan has not become an NPA for a bank, the SARFAESI Act (the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) cannot be invoked,” said a senior executive from a public sector bank. The Act enables lenders to recover dues without court intervention. Banks and financial institutions can take possession of securities in case of a default and sell these to recover the loan.
The finance ministry has asked IBA to hold discussions with RBI to amend regulations and enable uniform asset classification in case a borrower defaulted on loans from some members of the consortium.
According to the policy on joint lending agreement prepared by the finance ministry, the proposal was floated in the light of recent high-value frauds that resulted from the lack of an information-sharing mechanism among banks. Though RBI, in 2009, had asked banks to be adequately informed about borrowers with exposure to multiple banks, the ministry had stated the arrangement wasn’t working in a satisfactory manner.