The banking industry is in a quandary after the Indian Banks’ Association (IBA), the premier industry lobby, withdrew its communiqué calling attention to a finance ministry letter on the treatment of stressed companies that have taken loans of up to Rs 200 crore.
The ministry’s letter had said banks are to work with the promoters of these companies to find long-term solutions, even offering a one-time settlement scheme. This was to ensure that “under no condition are companies forced into closure and job losses furthered”. It had observed that “banks, instead of arriving at a balanced solution, end up referring the matter freely to the National Company Law Tribunal (NCLT)”.
The Department of Financial Services’ (DFS') letter to the IBA, in turn, had been triggered by the input it had received from the Prime Minister’s Officer (PMO).
The IBA’s withdrawal of its communiqué on February 17, just four days after issuing it, and the lack of guidance on the road ahead is creating confusion. The financial year comes to an end in less than a fortnight, and banks have to take a call on the treatment of stressed accounts, whatever the ticket size.
And the 10 state-run banks that are merging have to arrive at a common policy. Furthermore, some of these exposures (though small) could be part of a consortium, or multiple banks.
“The IBA communiqué was based on the suggestions received from authorities at the very top of the decision-making chain. And we have to act on the DFS letter at the policy level as it has not recalled its suggestion,” said a senior banker.
Official at the association said the communication was withdrawn to make the focus clear. Plus, such issues need vetting by the IBA’s highest decision-making body — the management committee. However, it is not clear when that will be re-issued with suitable modifications. He, however, did not specify a timeframe for issuing revised communication.
Complicating matters further is the fact that if banks act on the DFS suggestion, they will draw in the Reserve Bank of India (RBI).
This is because North Block is in effect signalling forbearance on the part of banks for companies which have taken loans of up to Rs 200 crore, and are under stress.
The issue is also linked to the central bank’s June 7 circular on the resolution of stressed assets, especially on the treatment of accounts under Rs 1,500 crore.
“The DFS’ letter appears to be suggesting that the range will now be between Rs 200 crore and Rs 1,500 crore,” said another senior banker.
The central bank, on its part, has not yet declared the cut-off date for the treatment of such accounts. In the case of exposures above Rs 2,000 crore, the effective date was June 7; for those that ranged between Rs 1,500 and Rs 2,000, it was January 1, 2020.
The June 7 circular was also categorical that all lenders must put in place board-approved policies for resolution of stressed assets, including the timelines for resolution.
“Since default with any lender is a lagging indicator of financial stress faced by the borrower, it is expected that the lenders initiate the process of implementing a resolution plan (RP) even before a default,” it had said. And these guidelines were to kick in irrespective of the loan size.
The IBA, while confirming the recall of its communiqué, declined to give more details. It has been gathered that the IBA’s management committee had not discussed the contents of the DFS letter even though the initial communiqué, and its subsequent withdrawal, came from Rajeev Dewal, the body’s legal advisor.
The DFS letter was for empowering merit-based decision-making in banks and financial institutions without the fear of being questioned by investigative authorities. This, it noted, “can go a long way in terms of de-clogging the NCLT ecosystem”. And an atmosphere needs to be created wherein every government servant works to protect against the closure of companies and loss of jobs.
It was also explained that the Insolvency and Bankruptcy Code was passed for two primary reasons — to help banks recover dues from companies that have failed; and to prevent them from dying so as to limit job losses.