Infrastructure investment trusts (InvITs) are enjoying immunity from insolvency proceedings and should be brought under the Insolvency and Bankruptcy Code, a top official from SBI said on Friday. Ashwini Kumar Tewari, the managing director of the bank, said lenders need the assurance of being able to recover their dues from InvITs in case of a default and added that they are in touch with the Reserve Bank and the government on the same.
“We need to bring these trusts, which are bankruptcy remote, within the purview of the IBC because that will go a long way in giving us the assurance that this is like any other asset,” Tewari said, addressing an NBFC event organized by industry lobby Assocham here.
He elaborated that at present, the primary responsibility of an InvIT or a special purpose vehicle under it is towards the trust holders and there are “gaps” which need to be filled.
“This space needs clarification; this space needs assurance to the lenders that in case there is a (legal) testing of default etc, it will be the same as any other lending that they do within this space (infrastructure),” he said.
Tewari mentioned that banks also lack the power to change management at entities, which is a key feature under the IBC provisions and has already been invoked in the past.
He also made it clear that SBI is “very bullish” on the InvITs space because it takes away the long-term risk from the bank after a project is completed, and also because it provides steady flow of cash to pension funds and other investors.
The IBC was promulgated in December 2019 while InvIT saw the maiden listing in 2017.
Meanwhile, Tewari also questioned the need for a non-banking financial company (NBFC) to have a long list of lenders, and pitched for consortium arrangements in the same.
“‘We feel that if there are so many banks involved, each with a smaller share and yet the overall credit size is large, the only conclusion which can be drawn is the follow-up, and the control mechanism on the portfolio then is so much lesser. And that is something we are not very comfortable with,” he said.
Making it clear that SBI has flagged the issue to the RBI, Tewari said banks do not want any caps on the number of relationships an NBFC keeps.
At present, a bank gets a separate list of debtors, and has to do a sample check on every account, which is “not a good way” to handle large exposures, Tewari said, adding that in case of a similar sized manufacturing or a services company, the number of bank relationships is much smaller.
If this sector has to sustain, this particular issue needs to be resolved, he added.
Tewari welcomed the higher awareness levels and strength among NBFCs in southern India on internal audit and said this helps reduce any instances of risks.
The heightened regulatory scrutiny of the NBFC sector is courtesy the stress faced by the sector after the IL&FS crisis in 2018-19, and also the growth which we have witnessed, he said.
At present, over half of the NBFC sector’s funding requirements are funded by the banks and the risks coming from this have to be taken on board, Tewari said, advocating similar regulation between banks and NBFCs.
Domestic rating agency Icra’s group head for financial sector ratings, Karthik Srinivasan said the banking industry’s exposure to NBFCs is at an all-time high of over a tenth of the overall portfolio and added that NBFCs which are able to maintain better credit quality will not face any challenges on funding.
There are some pockets where there are asset quality issues, he said, adding that some retail NBFCs have been growing the riskier unsecured books at double the pace of overall growth in assets under management.
