The case for an alternative, transparent credit delivery mechanism in India4 min read . Updated: 30 Jan 2019, 09:22 AM IST
- There have, reportedly, been variances in initial asset quality reviews at different banks for the same assets
- Absence of a mechanism to sell loan assets make it difficult for banks to align their assets and liabilities
Our growing population demands strong gross domestic product (GDP) growth to meet its aspirations. While consumption demand has held up our economy in the recent past, increased investments are required for sustained growth. Credit will fuel this growth. The non-performing asset (NPA) situation will wither away and stabilise, hopefully, over time. Are our credit delivery mechanisms strong enough to finance the emergent investments, including infrastructure, without a repeat of the same mistakes?
Both consortium and multiple banking arrangements are riddled with disharmony among participants. Absence of a common framework for terms and covenants, and multiplicity of interest rates has compounded these issues. There have, reportedly, been variances in initial asset quality reviews (AQRs) conducted at different banks for the same assets.
Absence of a mechanism to sell loan assets make it difficult for banks to align their assets and liabilities. The few deals struck are episodic and bilateral and priced based on the desperation of the seller.
We are witnessing increased transparency in the setting up other systems and procedures in India, the foundation of which are based on information symmetry. What are the interventions that are required to create an alternative delivery system for greenfield/brownfield/project exposures, say, beyond ₹2,000 crore using the same foundations?
The first few steps in that direction have already been taken—the setting up and stabilisation of the Credit Information Bureau (India) Ltd and the Central Repository of Information on Large Credits, a public credit registry in the works, 40% of the cash credit borrowings, for borrowers with working capital limits of Rs150 crore and above, to be termed out, co-origination norms for non-banking financial companies and banks in the priority sector, benchmark rates for small and medium-sized enterprises and personal loans, and the Trade Receivables Discounting System platform for receivables discounting. However, many more structural dispensations are required, especially for large exposures.
# Alignment of the credit markets across loans, bonds and treasuries.
# Development of a reference rate to provide harmonisation of spreads across players and to facilitate documentation and transferability.
#Common loan agreement and covenants to facilitate transferability, faster disbursal and legal resolution,
#A platform to enable participation in loans by various players, including banks, high net worth individuals (HNIs), and foreign portfolio investors,
#Compulsory security trustee arrangement,
#Compulsory fiscal and transfer agents,
#Compulsory and uniform security identification protocol
#Single point asset review
We, therefore, propose an alternative credit delivery system broadly as under.
All large corporate loans above Rs2,000 crore could be underwritten by one of the top five or six banks, say State Bank of India, ICICI Bank, HDFC Bank, Bank of Baroda, Punjab National Bank, or Axis, who could develop sectoral expertise for due diligence, underwriting and monitoring. These may be called the Level 1 banks.
The lead bank would underwrite 100% and hold till maturity at least 25% of the exposure.
The loan would require to be syndicated for at least 50% of the exposure else it would devolve on the underwriting bank, which would be required to hold the exposure till date ocommencement of perhaps, with enhanced regulatory provisioning requirement. Such a provision may lead to a revision in pricing or terms, conditions, or covenants, ensuring that the pricing is aligned with the attendant risks, as perceived by the other participating banks and perhaps lead to the success of the syndication. All the participating Level 1 banks would continue to hold greenfield and infrastructure loans till project C.O.D.
The loan could be priced differentially pre and post C.O.D, with spreads linked to a common benchmark, which could be the average of the MCLRs of the Level 1 banks and the norms for security trustee and facility agents common in large syndications could be followed. Disbursals would be strictly controlled by the lead bank ensuring maximum compliances of conditions precedent. All other services could also be outsourced. Interest rate fixation based on movement in benchmark indices and compliances would vest with the facility agent.
Post C.O.D, the Level 1 banks, may down sell their exposure to Level 2 participants including other banks, funds, and HNIs through novation/assignment. At this stage, the project risk would be over and with the economics of the project stabilising, rating assignments and alignments with pricing would be possible.
The loan could then allowed to be traded based on ratings and benchmark pricing and balance tenor in lots of say Rs50 crore.
Asset quality review could be performed centrally at the level of the originating Level 1 bank, which in any case would continue to hold at least 25% of the exposure till COD, disseminated through a centralised data base, maintained by the regulators, and available to the facility.
Such a process/structure would help aligning risk to pricing and the same to markets/benchmark facilitating in the process the creation of a secondary markets in loans, addressing the asset-liability management requirements of the participating banks too.
The time to seed these changes could now? not be more opportune.
Sunil Srivastava, retired deputy managing director, SBI & Anand Sinha, former deputy governor, RBI.
Views are personal.