BackBankers instructed to abide by joint lenders’ forum decisions
CEOs of public sector banks told to work together to deal with stressed assets in the banking system
Premium
Mumbai: The finance ministry has asked bankers to adhere to decisions taken by larger lenders as part of the joint lenders’ forum (JLF) to help recover bad loans.
In a letter from the department of financial services, dated 18 February, addressed to the chief executive officers of public sector banks, the finance ministry has said that bankers should work together to deal with stressed assets, three public sector bankers said.
Starting 1 April 2014, the Reserve Bank of India (RBI) had introduced a new stressed asset management framework, which included the setting up of a JLF for accounts that were overdue for more than 60 days. The idea was to recognize stressed accounts early and speed up the process of resolution.
These lenders’ forums have, however, made little headway because of disagreements among the bankers on ways to proceed. On 17 February, Mint had reported that divergent views among lenders was adversely affecting the decision-making capabilities of a JLF, thereby causing delays in the way stressed asset management norms were being implemented.
“The letter was a general advisory from the finance ministry asking bankers to scrupulously follow the decisions made by the majority of lenders at JLFs and therefore ensure that there is no conflict among the various lenders and swift decisions are made by the JLF," said the first banker cited above—a senior official of a large public sector bank. He requested anonymity, as he is not allowed to speak on this matter.
In case of non-adherence by any lender, the letter stated that the bank forming the JLF could report the matter to the department of financial services, the banker mentioned above said.
The bankers cited above said the letter came after the finance ministry had consulted bankers on the effectiveness of JLFs and the issues being faced during negotiations at the JLF level.
“Many times, lenders who have a smaller share in the consortium end up not supporting the corrective action plan (CAP) because they feel they will have to wait for long before they get their repayment," said the second banker cited above—the executive director of a public sector bank who, too, requested anonymity.
As per RBI rules, a JLF must come up with a CAP in 45 days and decide whether the debtor merely needs some hand-holding, or if the forum should opt for debt restructuring or recovery. In order to finalize a restructuring plan, at least 75% of creditors by value of the loan and 60% by number of lenders in the JLF must agree to the plan.
“Even though the RBI norms are clear that the JLF decision is binding on all members, there would often be some disagreements in the specifics of the plan, which would then further delay the implementation of the plan," said the third public sector lender cited above.
Meanwhile, RBI, too, has started asking bankers to submit information on number of JLFs formed over the last year, the nature of cases referred to the JLFs and the stance taken by the respective banks in the lead up to a CAP being agreed upon, said a fourth banker.
In a Mint interview on 19 February, Aditya Puri, managing director and chief executive officer, HDFC Bank Ltd, had cautioned that the JLF mechanism can be misused. “The JLF is intended to be a mechanism that takes us closer to Chapter 11 (US bankruptcy law allowing the reorganization of a company’s business and assets and restructuring of debt). It is not intended to defer the problem further. I feel that here should be a provision if a bank objects to the new structure not being viable, then RBI should mediate. Then it will work. There is scope for misuse of JLF," he said.
Gross NPAs at 40 listed banks in the October-December quarter rose 20.5% to ₹ 2.93 trillion from ₹ 2.43 trillion a year ago, according to data available from Capitaline Database.
Experts say that the centre’s involvement in ensuring that the stressed assets in the economy are managed properly, is needed as delays often prove costly.
“There are cases where the JLF simply discusses the issue over and over because the lenders cannot come to a common agreement. The main reason is that composition of the lending consortium is complex, wherein certain lenders have more rights to the underlying assets than the others. If it is ensured that all the lenders are clear about their rights from the beginning, the JLF mechanism can prove to be a success," said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services LLP, a corporate advisory firm.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
