Lack of ICA to hit PMC Bank's HDIL exposure

PMC Bank’s woes might worsen as urban co-operative banks have not been made part of inter-creditor agreements (ICA). This raises a big question mark on where the bank stands in the queue of creditors that have an exposure to the realty firm, Housing Development Infrastructure (HDIL).

Under the Reserve Bank of India’s (RBI) June 7 guidelines on resolution of stressed assets, all bank groups except urban cooperative banks (UCBs) have to mandatorily sign the ICA. These include all scheduled commercial banks (excluding regional rural banks or RRBs), the National Bank for Agriculture and Rural Development, the National Housing Bank, Exim Bank, Sidbi, all small finance banks, as well as systemically important non-deposit taking and deposit taking non-banking financial companies.

In effect, UCBs such as PMC Bank (and RRBs) share space with an elite group comprising high-street mutual funds, private equity firms, alternate investments funds, and off-shore lenders that have no seat at the ICA table.

It is not clear as to where PMC Bank stands in the pecking order for recovery of its dues from HDIL, worth Rs 6,500 crore. The realty firm recently enlisted Knight Frank for the valuation of 40 properties, for repayment to PMC Bank.

PMC Bank’s exposure to HDIL stands at Rs 6,500 crore, or 73 per cent of its loan-book of Rs 8,880 crore. This is much higher than that of other banks, which are part of the ICA. The total debt on HDIL’s book for FY19 was Rs 11, 891 crores, but the true extent of its leverage may take time to be ascertained. A person in the know said: “PMC Bank cannot claim primacy on the recovery of HDIL’s assets to square off its exposure with the firm.”  

Not only does it stand excluded from the ICA framework, but it also has to share space with the claims of others with an exposure to HDIL such as Allahabad Bank, Andhra Bank, Bank of India, Central Bank of India, IDBI Bank, Syndicate Bank, The Jammu & Kashmir Bank, UCO Bank, Union Bank of India, YES Bank, IL&FS, and LIC.

It is surmised that the central bank will now be forced to take stock of this situation, wherein UCBs are outside the purview of the ICA. This is also because the profile of several UCBs now mirrors those of scheduled commercial banks.

The central bank, in its Report on the Trend and Progress of Banking in India for 2018-19, says that 36.17 per cent of scheduled UCBs’ loans fall in the highest bracket of Rs 1-5 crore, and above Rs 5 crore. PMC Bank had exposure of Rs 6,500 crore to HDIL alone. Further, there is nothing to suggest that other UCBs may not have large exposures well above the range mentioned by the RBI. 

The PMC Bank mess also brings into relief the B N Srikrishna’s Financial Services Legislative Reforms Commission (FSLRC, 2013).