Banking: Playing Blind

In july 1997, Tata Tea pulled out of its unwieldy decades-old State Bank of India (SBI)-led consortium of a dozen banks to try Mint Road’s new brew for India Inc. — multiple banking. You could shop bilaterally for loans from banks, get a “bespoke” structure and pricing. Two decades on, these galactic arrangements are in disarray — the line between consortium and multiple banking has blurred; and bankers are now in a tizzy.

The fallout has had a terrible consequence; “visibility” on the state of credit is less than adequate. And the huge information asymmetry on matters credit is one of the key reasons for the dud-loan pile which tops $100 billion now though much of it is provisioned for. Senior bankers have raised the issue with the Reserve Bank of India (RBI) to rectify the situation which is nothing short of “delinquent behaviour”.

Traditionally, in a consortium, there are inter-creditor ground rules; the lead-bank keeps an eye on the goings-on. In multiple banking, a borrower gets independently assessed on credit limits set by individual banks. But today banks within a consortium also offer benefits of “multiple banking” or “club deals” to borrowers. So what you now have is a Platypus — a semi-aquatic mammal that also lays eggs, which the naturalist George Shaw was inclined to dismiss as a hoax as “there might have been practised some arts of deception in its structure.”

At the systemic level this “Platypus” has blind-sided banks as it encourages a high level of corporate debt leverage which comes back to bite them. You have more trouble: banks are split over the 75:25 rule in decision making as it tips the scale in favour of the majority of lenders by value who may not be the most prudent. And borrowers, in turn, play off one bank against another to their advantage.

Whose line is it anyway?
Within a consortium, some treat an account as a non-performing asset (NPA) in a quarter, while others may not. If banks in a consortium are “talking” to one another, why is that they can’t provide for a default irrespective of the 90-day norm and treat it as an NPA upfront — after all there’s nothing in Mint Road’s book that says you can’t do so? The response on this differs.

State Bank of India’s chairperson Arundhati Bhattacharya tells BW Businessworld: “Information is available. There is the CRILC (Central Repository of Information on Large Credits) data on the RBI site. And yes, an account can be performing in one quarter and not be so in the next. Now when you say provide irrespective of the 90-day norm, then you have to provide for everybody and anybody. It doesn’t work that way.”

Shyam Srinivasan, managing director (MD) & CEO of Federal Bank, says, “It could be a timing issue and depends on the record of recoveries and other relationships the client has with an institution.” He does not read too much into it. “At most, the delay may be for a few weeks. It may reflect in a different quarter from a reporting standpoint and could be a timing issue. After that if it has missed all criteria, then the account is tagged as an NPA,” he adds.

You may get the impression that information is one thing, but NPA classification is a technical or business call. It’s not always so. “It’s better to treat every information and opinion on its merit irrespective of the size of lending or exposure of the bank. At times, a few customers tend to take undue advantage of any disconnect in terms of information flow that may exist,” says Murali Natrajan, MD & CEO, DCB Bank. On early provisioning for NPA, N. Kamakodi, MD & CEO of City Union Bank, is blunt: “Why should you do so? Pull on as long as you can to avoid the pain!”

Now differences within a consortium in itself is no cause for alarm, but the extent of the “systemic exposure” to a borrower is clouded due to multiple banking in these tough times as banks are called to honour their “special long-standing relationships”.

As Divyanshu Pandey, Partner-J Sagar Associates points out: “At times an existing lender may not be in a position to lend due to single-borrower limits being exhausted or internal sanctions not being in place. A new lender may be willing to provide credit on the basis of its credit assessment and at a better pricing. In these circumstances, refinancing of an existing loan may be resorted to by borrowers”.

And that new lender will do so on terms to protect its own interest; and a transaction of this nature has its own dynamics – both the borrower and the lender will work to ensure their “relationship” is insulated from the wider worries within a consortium.

The Aditya Puri Committee Report (Data Format for Furnishing of Credit Information to Credit Information Companies) of 2014 had this to say on derivatives: “Borrowers have, in general, not been forthcoming in sharing such information with lenders, particularly with banks that are not part of the consortium”. You can well imagine the blowback if matters were to go awry.

It’s now a game of self-interest. “It (information asymmetry) poses a systemic risk in itself, but as banks’ asset cover on loans start to erode, it’s used in a strategic and proprietary manner to get a good deal for yourself as a lender at the cost of other banks,” says Suhail Nathani, managing partner at Economic Law Practice. Reshmi Khurana, MD of Kroll (India), cites “the inability to take legal recourse due to what’s often perceived as a tedious and unwieldy judicial process”. This compounds the issues as “companies can get away from borrowing from Peter to pay Paul, until the proverbial music stops”, she says.

It’s Boiling Below The Surface
Banks are rethinking the institutional credit-delivery arrangement — be it consortium or multiple banking.

“Even within a consortium, a decision once taken is not honoured. Then what’s the point? As for smaller banks, who cares? This has serious implications when it comes to wilful defaulters as they can get away,” says a candid Vishwavir Ahuja, MD & CEO of RBL (the erstwhile Ratnakar Bank). You get the feeling he’s aware of the poet A. H. Auden’s quip: “We are all here on earth to help others. What on earth others are here for, I don’t know”.

Says Kamakodi, “We have predominantly single-banker relationships with minimal exposure to consortium and multiple banking. Getting into consortia would have helped us grow faster, but it would have come at a price.” You hear more of the same from Rajat Monga, senior group-president at YES Bank: “We lead the financing and help syndicate, or we are into bilaterals.” It’s because the bigger banks call the shots in such arrangements; and it leads to a certain line of thinking — “expecting others to solve your problems,” says Monga. DCB’s Natarajan walked out of the Corporate Debt Restructuring game for the same reason.

The more prudent banks now prefer to settle issues bilaterally as joint mechanisms often lead to power struggles among banks at every stage from loan disbursal, its monitoring to recovery. All this even as some banks dole out loans without a clue on the risks involved. RBI’s deputy governor S. S. Mundra was scathing: “Going forward, they have to refrain from binging on what their neighbours are eating.”

Worse, nobody senior from a bank attends these credit meetings that may last anywhere between an hour to half a day which usually happen when bankers squabble over a credit mess. In the case of state-run banks, it’s not unusual for a new officer to overturn a decision as his new boss has a different worldview on how the bank’s interest is to be protected. An RBI inspector who did not want to be named says, “The consortium was supposed to be a joint family, but everybody in there behaves as if they have gone nuclear.”

The big bone of contention is the 75:25 rule; there’s now a debate on whether this rule needs to be revisited. Says Srinivasan: “If a lender has participated in a consortium and the lead-bank has been facing off with clients, the lead bankers may have greater visibility on the client and that may bring about the view on who calls the shots, if such a line can be used. The issue is that a stake in relationship will bring about its own implications and it can be argued both ways on who calls the shots. But going by the rule book, only satisfactory record of recoveries should decide the fate of the credit!” You can interpret the last line to mean that the best solution isn’t always taken on board.

It’s exactly the kind of quicksand Mint Road had feared back in 1997 when the mandatory consortium banking system was disbanded. It asked banks to report credit limits both as part of the consortium and as individual banks, irrespective of whether the consortium-leader was doing it on their behalf. The logic behind this was relying only on the lead-bank’s weekly returns will skew the picture as inter-bank confirmations (within existing corporate consortia arrangements) of limits sanctioned to a corporate usually come in late. And consortium members’ also sanction limits with the lead-bank in the dark.

A truce of sorts was called among banks after a round of meetings at the Indian Banks’ Association and South Block as credit abuse mounted. Right after, in a note (23rd April 2012), V.K. Chopra, deputy secretary - Department of Financial Services, summed up the shortfalls — the security offered to each bank is separate and no formal understanding exists on financing the same borrower; that all this is “contrary to the principles of credit discipline which requires that a wholesome view of entire operations of a customer be taken under consideration by the lender and the assessment and monitoring of credit needs be done in totality”. He also called attention to the high-value frauds and the Central Vigilance Commission’s concerns over it. But we are still at the same place.

You Could Have A Bigger Mess
As the information asymmetry gets bigger, lawyers and forensic firms find themselves in a sweet spot with more incoming business.

Says Pandey, “Banks should, with the help of third-party service providers, consider undertaking deeper analysis of the data provided to them and a second level of verification, by way of forensic analysis. Information provided by the borrower when there is incipient stress should be independently cross verified to the extent possible.” Adds Khurana, “There are multiple instances when Kroll has been retained to conduct a discreet investigation by a bank with a smaller exposure, because it wanted to take action sooner than the banks with larger stakes were willing to.”

Mint Road has an idea to bring the situation under control— restrict the size of the consortium. But as bankers point out off-record, this does not rectify the current mess.

As the credit demand of India Inc. rises, you will need more banks within a consortium. More so as several banks have hit their exposure limits to either a firm or an industry or both; or are just not in a position to lend as in the past because of capital adequacy constraints. And if borrowers continue to flit between consortium, multiple banking and “club deals” with bankers turning a blind-eye, the mess will only get bigger.

IN A NUT-SHELL

A look at the lending ecosystem as well as the pros and cons of various channels

Consortium banking
A system wherein several banks lend to a borrower with common ground rules headed by a consortium leader.
Pros: In theory, banks within a consortium have both a worm’s and bird’s eye view on the borrower. They can share information readily and can red-flag concerns. Useful in large and complex credit exposures
Cons: Unwieldy and bureaucratic; does not usually allow leeway by way of relationship banking

Multiple banking
It allows a borrower to have relationships with several banks on a bilateral basis
Pros: A borrower can negotiate on a bilateral basis with banks. It allows for flexibility as each bank can extend credit based on its appraisal. Pricing on loans can be relationship-driven
Cons: In the absence of information sharing among banks, a borrower can abuse and avail of huge credit before the system comes to know of it. Over-leverage is a common fallout

Club deals
A relatively new “informal arrangement” that is pre-marketed to a few relationship lenders
Pros: It is a variant of loan-syndication, but only available to top-end borrowers. Not common in India
Cons: Like in multiple banking if things go awry, it’s each bank to its own

raghu@businessworld.in; @tabonyou