Private and hush-hush deals that some banks cut with acquirers of stressed loans will soon come to an end. Under a new framework that high-street banks agreed on last week, lenders will have to ensure that the decision to auction loans is notified to all key players in the market.
This will end the practice of pushing through a sale by putting out the auction advertisement in an innocuous newspaper while keeping many potential bidders in the dark.
Banks have also come together to lay down a timeline to close such deals within seven working days after lending banks give a final approval to the transaction.
A model process document for transfer of stressed loans along with a checklist of information that banks would share with bidders at pre-deal stage was finalised and circulated among lenders last week, a senior banker told ET.
“This is a code of conduct to enable wider participation in loan sale deals and bring more transparency. Also, due to changes in the market dynamics, the document mentions all the information about a loan that banks must provide,” said an industry person.
Due diligence in 2-3 weeks
Under the circumstances, banks will have to give the information on the auction to the Association of Asset Reconstruction Companies (ARCs) which in turn would pass it on to the member ARCs which are the prime acquirers of bad loans. ARCs, sometimes in tie-up with investors, buy loans from banks by paying at least 15% of the deal value in cash and the balance in the form of security receipts, which are bond-like instruments whose return and redemption depend on the recovery from the underlying assets. According to the broad timeline proposed by banks, due diligence of the loan assets should be done within 14-21 days after sharing the preliminary information memorandum.
RBI takes note
Quiet deals between some of the private sector banks and ARCs have also drawn the attention of the Reserve Bank of India (RBI). The regulator is believed to have raised the issue during annual inspections of banks. There have been many such transactions.
For instance, once a private sector lender sold loans given to a five-star hotel to an ARC in a swiss challenge auction in an all-cash deal without adequately publicising the sale. The acquiring ARC then sold it to another ARC in a bilateral deal. The transactions between the bank and ARC and between the two ARCs were kept under the wraps. It came to light when the hotel went into corporate insolvency. In another case, some of the private banks and housing finance companies announced the swiss auction by putting out an ad in a publication having a small readership.
Indemnity demand
While last week’s deal framework has gone down well in the stressed asset market, banks and ARCs would have to sort out a few other issues to quicken deals. For instance, ARCs want banks to compensate them if they later suffer losses due to non-disclosure of any material facts at the time of the loan sale. Banks, particularly a few large state-owned banks, are unwilling to give any such indemnity as the transfer of the exposure is on ‘as is where is’, ‘as is what is’ and ‘without recourse basis’.
“ARCs are not asking for any guarantee. But if they have been misled or were unaware of facts which surface later, they would insist on being compensated,” said a senior lawyer.
Banks are also insisting that ARCs should have no links whatsoever with the borrower. “Banks want to avoid a situation where an ARC may be fronting for a borrower. That’s understandable. But, there are cases where ARC had earlier bought a slice of debt and would now want to buy the balance bank loans to aggregate the debts,” said an ARC official.
“We hope banks and ARCs would soon sort out the two issues – the assignor’s indemnity and the connection between ARCs and borrowers,” said an industry person.
