FM Sitharaman's bank mergers step will make resolution process easier

With finance minister Nirmala Sitharaman announcing merger of smaller public sector banks with larger ones, experts believe it will be positive step. 

It will build a consensus among lenders that are a part of the committee of creditors (CoC) of companies undergoing resolution via the insolvency and bankruptcy code (IBC) or via the inter-creditor agreement in accordance with the June 7 circular of the Reserve Bank of India (RBI).

In the current form, with so many lenders being a part of the CoC, often the resolution process gets stuck with many smaller players not agreeing with the majority view. In such cases, the resolution will be easier now.

“The positive fallout of consolidation is a lesser number of banks in a consortium. Those with small share (loans) in the consortium often held back consent or played hard ball, delaying the restructuring exercise. Now, activity may be done in less time than before,” said a senior State Bank of India (SBI) official.

According to Ajay Shaw, partner at DSK Legal, “With the consolidation of public sector banks, the impact on the insolvency and bankruptcy code will be: Decision making will stand consolidated of the banks being merged; this will be helpful in the context of unifying the decision of multiple lenders.”

So far as voting share of lenders in the CoC is concerned, experts believe banks which are merging with anchor banks will have to give mandate to anchor banks for their exposures in the consortium. A similar kind of arrangement was followed when the erstwhile Vijaya Bank and Dena Bank were merged with Bank of Baroda. The two banks had mandated Bank of Baroda to take decisions on their behalf in consortiums where they had exposures to.

Ashish Pyasi, associate partner at Dhir and Dhir Associates, said, “Post merger, in cases where both the anchor bank and the amalgamating bank are present, due to the amalgamating bank's share going to the anchor bank, share of the anchor bank will increase in the committee of creditors and accordingly the voting rights will also increase.”

As regards impact of the merger on matters that are under resolution, the banks will continue to participate in the CoC according to their individual claims till the merged entities don’t come into effect, Pyasi added.

Also, after the merger comes into effect, only the voting share will change and the ongoing resolution process will not be stalled.

“The consolidation will have an impact only once the process is completed. Till such time, each bank will continue to exercise its right independently in the committee of creditors,” Shaw added.