Mumbai: The country’s largest auto maker by revenue, Tata Motors Ltd’s Rs4,200 crore debenture sale could be the first and the last to come with a bank guarantee.
Stringent guidelines: According to RBI regulations, the credit exposure to a single borrower cannot exceed 15% of the capital funds of a bank. For a group, it should not exceed 40% of a bank’s capital funds. Harikrishna Katragadda / Mint
State Bank of India (SBI) was the main guarantor of the 20 May issuance, aimed at helping Tata Motors refinance part of a loan taken in March 2008 to pay for the purchase of the Jaguar and Land Rover luxury car units of Ford Motor Co.
The Reserve Bank of India (RBI) expressed reservations late on Friday about a government-owned bank offering such a guarantee, which effectively amounts to a sovereign guarantee.
RBI expressed concern that such guarantees may impede the development of corporate bond market in India.
“It is observed that, of late, certain banks...have been issuing guarantees on behalf of corporate entities in respect of non-convertible debentures issued by such entities,” the central bank said in a statement.
“It is clarified that the extant instructions apply only to loans and not to bonds or debt instruments. Guarantees by the banking system for a corporate bond or any debt instrument not only have significant systemic implications but also impede the development of a genuine corporate debt market.”
Interest rates on proxy sovereign bonds will always be less because of the low risk of default on such bonds. The effective government backing comes in the way of price discovery, essential for the development of the corporate bond market.
RBI directed banks to strictly comply with the regulations and, in particular, “not to provide guarantees or equivalent commitments for issuance of bonds or debt instruments of any kind”.
SBI, the country’s largest lender by assets, is 59% owned by the government of India.
An email sent to SBI on Friday remained unanswered. Mint also sent an email to RBI on Friday afternoon on the subject before the release of the central bank’s notification.
According to people in the banking industry familiar with the development, RBI deputy governor Shyamala Gopinath, a director on SBI’s board and a member of the executive committee of the board that vets all high-value loan proposals, had strong reservations about the bank offering such a guarantee.
Gopinath discussed the topic at SBI’s executive committee meeting on 23 May and declined to ratify it, said the people, who didn’t want to be named.
Vasantha Bharucha, a government nominee on the bank’s board, too had reservations about the guarantee, the people said.
The executive committee of the board meets every week. Its members include SBI chairman O.P. Bhatt and managing directors S.K. Bhattacharya and R. Sridharan, apart from Ashok Jhunjhunwala, Dileep Choksi, S. Venkatachalam, D. Sundaram, and Gopinath, Barucha, among others.
According to banking industry norms, banks cannot offer a guarantee on bond issuance leveraging their own balance sheets because it amounts to taking direct exposure to companies that issue such bonds.
A guarantee fetches fees to a bank, normally 1% of the bond issue, but if the debtor fails to settle the debt, the onus is on the bank to cover it.
Because the guarantee given to Tata Motors will be considered direct exposure to the company, it will dent SBI’s ability to lend to the company.
According to RBI regulations, the credit exposure to a single borrower cannot exceed 15% of capital funds of a bank. For a group, it should not exceed 40% of a bank’s capital funds if the project is not related to infrastructure.
It can be enhanced by another 5% by taking approval from the bank’s board members.
Icra Ltd and Crisil Ltd, both rating agencies, assigned the lowest risk rating to the Tata Motors debenture sale because the issue was backed by SBI’s guarantee.
The Rs4,200 crore bond issue was divided into four portions maturing in two years, four years, five years and seven years, and SBI had planned to share the risk with 10 other banks, keeping a portion of it for itself.
If it has not already distributed the risk among other banks, it will not be able to do so now because RBI’s notification has effectively closed the door for banks offering any such guarantee.