Home >Industry >Banking >PSB  mergers  the  new  hurdle for resolutions under IBC
Small PSU banks are unwilling to absorb the shocks of taking large haircuts on their bad loan exposures. (Mint)
Small PSU banks are unwilling to absorb the shocks of taking large haircuts on their bad loan exposures. (Mint)

PSB  mergers  the  new  hurdle for resolutions under IBC

  • Small  banks  postpone  key  decisions  on  resolution  to  stay  risk averse as merger date nears
  • IBC resolution easier when acquiring and target banks are in the same consortium

The approaching deadline for the merger of small public sector banks with their larger counterparts is slowing down resolution of cases under the Insolvency and Bankruptcy Code (IBC). The deadline to complete the mergers is 1 April.

While small state-run banks generally have limited influence in lender committees of large assets, in cases where they have a substantial say, key decisions on resolution are being postponed until the ongoing mergers are completed.

For instance, lenders to Patna Highway Projects Ltd, a subsidiary of Gammon Infrastructure Projects Ltd, initiated the company’s corporate insolvency resolution process (CIRP) on 7 January, over a nearly 200-crore loan that had turned delinquent. However, key decisions on the case—starting with the initiation of bankruptcy proceedings—have been delayed by small public banks on the committee of creditors (CoC). Corporation Bank, Indian Bank, Bank of India, Indian Overseas Bank and Phoenix ARC are among the main lenders to Patna Highway Projects. Similar is the case of a bankrupt engineered wood company—Associate Decor Ltd—in which Corporation Bank, Bank of Baroda (Bob) and Oriental Bank of Commerce (OBC) are the three lenders. The CoC waited to make a decision because it wasn’t sure of the credentials of the Tanzanian buyer, who was the sole resolution applicant.

Bankruptcy experts say that the merger process has affected decision-making.

The Union cabinet on 4 March approved the consolidation of 10 public sector banks (PSBs) into four entities, a move aimed at having fewer but stronger lenders in India. Punjab National Bank, OBC and United Bank of India (UBI) will combine to form the nation’s second-largest lender; Canara Bank and Syndicate Bank will merge; UBI will amalgamate with Andhra Bank and Corporation Bank; and Indian Bank will merge with Allahabad Bank.

Delays are often because small PSU banks are unwilling to absorb the shocks of taking large haircuts on their bad loan exposures, or because they find it easier to abstain from approving resolution plans that are below a theoretical liquidation value. A single large loss on one asset may wreak havoc on a smaller bank’s capital adequacy ratios even when a large lender, such as State Bank of India, may be able to absorb the shock and wants the resolution to go through.

“There are bound to be delays when you have an upcoming mega-merger exercise and some banks are reluctant to take decisions now, wanting to wait till things settle down from April. Small banks are wary of the decision-making culture of the banks they will be folded into and don’t want to be caught off-guard," said a lender who did not wish to be named. “If, however, both the acquiring and target bank are in the same consortium, decision-making has not been much affected."

Ashutosh Agarwala, co-head- restructuring advisory services, Duff & Phelps, said: “Smaller banks have their own financial compulsions arising out of lower capital base and hence, they tend to take a conservative view in any insolvency resolution process. Their exposure is also limited and their preference generally is to either abstain or vote against any proposal if it involves any financial concessions or commitments. Hence, the merger of small banks with large banks will create more headspace for proactive and pragmatic decisions by merged banks during the insolvency resolution process."

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