Between Peter and Paul: Banks continue to be blindsided on dud loans

The information asymmetry on credit continues to plague banks

In July 1997, Tata Tea did away with its unwieldy decades-old State Bank of India (SBI)-led consortium of a dozen banks to sip on Mint Road’s new brew for India Inc — multiple banking, which was the first by a borrower. 

You could shop bilaterally for loans from banks, avail of “bespoke” structuring and pricing. A tad over two decades on after the maiden breakaway, the lines between consortium and multiple banking have blurred. Its fallout — “visibility” on the state of credit is less than adequate; and the huge information asymmetry on matters credit is one of the key reasons for the dud-loan pile up.

It might not strike you upfront, but Mint Road’s February 12, 2018 circular (struck down by the Supreme Court last week) had its genesis (partly) in the footsie being played by banks on dud-loans though the words “consortium” or “multiple banking” finds no mention in it. Some banks treated an account as a non-performing asset (NPA) in a quarter while others didn’t — within consortia too. It led to the doing away of all restructuring schemes options in vogue until then by the banking regulator – corporate debt restructuring (CDR), strategic debt restructuring, joint lenders forum, and the scheme for sustainable structuring of stressed assets. Senior bankers now keenly await the revised circular due in a fortnight; the fear is if it may entail giving up on the gains that were bestowed by the earlier norms, contentious though they may have been.

There is already chatter among senior bankers that the one-day default norm will be revisited. While this may even be welcomed on grounds that it was a bit harsh anyway, the bigger headache it may rewind the clock in other ways, and it will be back to square one. 

Just how widespread the passing-the-buck game is can be inferred from the drawing up of the inter-creditor agreement (ICA) even when the February 12 circular was in place. Formulated six months ago — when Piyush Goyal was in-charge of North Block -- it sought to cut through the bureaucracy within lending arrangements to get bankers come around the spit to carve out a resolution on dud-loans. It tipped the scale in favour of the majority of lenders (66 per cent by value) to quicken the decision-making process — be it on provisioning or the way ahead post that. All it did was to divide the banker’s fraternity — HDFC Bank is yet to sign up; other private banks did so only after much dithering; and foreign banks are yet to get their head-office’s nod for it. As for state-run banks, they signed up pronto as they had no choice anyway.

More of the same

“I was the first to walk out of the CDR”, says Murali Natrajan, managing director and chief executive officer at DCB Bank. City Union Bank and Yes Bank also opted for the bilateral. Reason: you don’t want to get pushed around by the lead-lender; issues had come to a head and a few bank private bank corner-room occupants raised the matter with Mint Road. “Even within a consortium, a decision once taken is not honoured. Then what’s the point”, wails one. In part this was due to the fact that many within a consortium assumed the lead bank will play the role of the watch-dog; and the concerns were not limited to just provisining alone, but the follow on measures too. They were proved right — when the RBI came out with the February 12 circular; and wrong – it turned out to be a once-size-fits-all approach. In effect, the pendulum had swung to the other extreme. Is discipline any better now? 

Says Sham Srinivasan, managing director and chief executive officer of Federal Bank: “After the asset quality review (AQR), and the February 12 circular, things improved vastly. You also have the CRILC (Central Repository of Information on Large Credits) wherein banks get to know the status at the systemic level on borrowers”. Yet even then few banks provisioned irrespective of the 90-day norm — there’s nothing in Mint Road’s book that says you can’t do so ahead of time. Nor has it led to a speedier resolution of cases.

Notes Abizer Diwanji, Partner & National Leader-Financial Services at EY: “It is not whether you have information or not that matters, but what have you done using it”. It is a reference to the lack of congruence of interests among banks, “and each acting in a proprietary manner to secure their interests” adds Diwanji. And this merry-go-around is on despite CRILC being around since FY15.

The way CRILC has been imagined makes it a limited tool. It is designed for supervisory purposes and the focus is on banks exposure to the borrower (as individual and, or as a group) — the borrower’s current account balance; bank’s written-off accounts; and identification of non-co-operative borrowers, among others. “It captures only limited details about borrowers such as the industry to which they belong and their external and internal ratings. The pooled information under CRILC is shared with the reporting banks, but is not shared with the credit bureaus, larger lender community, or researchers”, noted Viral V Acharya, deputy governor on July 4, 2017. This last-mentioned point is of critical import -- from the current fiscal large borrowers will have to tap 25 per cent of their incremental borrowings from the bond mart, but investors are not wired into CFILC as on date.

You may get the impression that information is on hand and NPA classification is a technical or business call. “It is better to treat every information and opinion on its merit irrespective of the size of lending or exposure of the bank. At times, a few customers tend to take undue advantage of any disconnect in terms of information flow that may exist,” adds Natrajan. 

It is boiling below the surface

It is not that the Reserve Bank of India (RBI) and North Block were not aware of the mess with consortia; and the playing of Peter against Paul. When the Centre announced its capital infusion plan for FY18 — Rs  80,000 crore through recapitalisation bonds and Rs 8,139 crore as budgetary support — it took on-board the worries in the consortium model, and its overlaps with multiple banking. There were to not more than 6-7 banks in a consortium; banks were to minimise exposure to big corporate loans to 10 per cent within it; breach of any loan covenant had to be red-flagged within the consortium; all credits above Rs 250 crore were to be specially monitored; and a survey was to be conducted by a reputed agency annually. The issue found mention again in February this year in the ‘EASE (Enhanced Access and Service Excellence) reforms for Public Sector Banks’ (or the ‘Ease Reforms Index’). 

“The point is that collateral-based lending has its limitations. And it’s value can erode quickly; and then what are you left with. It does not matter if the exposure is within a consortium or multiple banking”, says Ananda Bhaumik, managing director and chief analytical officer at India Ratings. “Maybe, cash-flow based lending is the way forward; the credit manuals may have to relooked at”.

The plot now moves to the proposed Public Credit Registry (PCR). It will enable bankers to rely on objective data for making credit decisions and defend their actions with market evidence when subjected to scrutiny. For instance, the Thomson Reuters Dealscan data — a PCR —­ showed credit growth after the Lehman crisis in the US was largely due to corporates drawing down (a form of a “bank run”) on existing credit lines. It is felt that banks Basic Statistical Return and CRILC can made into a PCR for banks; non-banks can join in later.

But that’s for another day. What you now by way of banking arrangements is a “platypus” — a semi-aquatic egg-laying mammal which the naturalist George Shaw was inclined to dismiss as a hoax “as there might have been practised some arts of deception in its structure.” It is a different matter that a platypus is for real.