Coordination between banks and financial institutions.docx
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Coordination between banks and financial institutions.docx
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Coordinationbetweenbanksandfinancialinstitutions
Co-ordinationbetweenbanksandfinancialinstitutions
BP.BC.82/21.04.048/00-01
February26,2001
AllCommercialBanks
(excludingRRBsandLABs)
DearSirs
Co-ordinationbetweenbanksandfinancialinstitutions
Inthecontextoftransitionofthebanksandtheall-Indiafinancialinstitutions(FIs)fromaregulatedtoaderegulatedregime,theissueofmoreeffectiveco-ordinationamongthebanksandtheFIshasbeenengagingtheattentionofthefinancialinstitutions,banksandReserveBankforsometimepast,particularlyinrespectoflargevalueprojectsjointlyfinancedbythebanksandtheFIs,withaviewtoavoidingdelaysandfacilitatebettersolutionstothecommonproblems.Inthisregard,informalmeetingsoftheHeadsofselectbanksandtheFIs,includingtheChairman,IBA,wereconvenedbytheGovernortoidentifyanddeliberateupontheissuesofcommoninteresttothebanksandtheFIs.Thefollowingsevenissuesemergedatthemeetings:
a.Timeframeforsanctionoffacilities;
b.Assetclassificationacrossconsortiummembers;
c.Discipliningborrowers–changeinmanagement;
d.Levyofchargesintheproblemaccounts;
e.Groupapproachforborrowers;
f.Sharingofsecuritiesandcashflows;and
g.Treatmentofrestructuredaccountsfortheassetclassificationpurposes.
AnInformalNoteindicatingtheconsensusarrivedattheaforesaidmeetingsonthefirstsixissueswasforwardedtotheCMD,IDBI,forcirculation/discussionamongtheparticipantsofthemeeting,withaviewtoevolvingaconsensuswhichshouldserveastheGroundRulesonthesaidsixissues.WeforwardherewithacopyoftheminutesofthemeetingoftheselectbanksandfinancialinstitutionsconvenedbyIDBIon24January2001,indicatingtheGroundRulesagreedtobytheparticipantsontheaforesaidsixissues.AcopyoftheInformalNoteforwardedbyustoIDBIinthematterisalsoenclosedforyourinformation.
2.Weshall,therefore,begladifyouwillpleaseplacetheminutesindicatingtheagreedGroundRulesbeforetheBoardofDirectorsofyourbankforadoptionandensureimplementationthereofthereafterexceptitemat(b)viz."assetclassificationacrossconsortiummembers"(para2oftheminutesofthemeetingheldonJanuary24,2001)inrespectofwhichbankswillcontinuetofollowthecurrentinstructions.AstheseGroundRuleshavebeenarrivedatafterintensiveconsultationanddiscussionsamongbanks/FIsandrepresentaconsensuswhichisintheinterestofallthebanks/institutionsandtheeconomy,itwillbeappreciatediftheRulesareimplementedinletterandspiritatdifferentlevelsofmanagement.
3.Asregardstheissuerelatingtothe‘regulatorytreatmentofrestructuredaccountsforthepurposeofassetclassification’,thematterisunderourexaminationandtheinstructionswouldbeconveyedshortly.
4.Pleaseacknowledgereceipt.
Yoursfaithfully
(M.R.Srinivasan)
ChiefGeneralManager-in-Charge
Encls:
Asabove
Informalnotefordiscussionon"Co-ordinationissuesbetweenbanksandFIs"
1.Introduction
ThelevelofNPAsintheIndianFinancialSystemwhichhasrecordedanup-wardtrendintherecentpasthasbeenanareaofconcernamongthelendersaswellasforthesupervisorsandtheGovernment.Ason31st March2000theNPAsfortheIndianBankingSystemaggregatedRs.60,841crore ## andthosefortheselectall-IndiaFIsitstoodatRs.18,146.00crore ##.Inthiscontext,aviewhasbeenexpressedthatatleastapartofthereasonforphenomenalriseinNPAshasbeenalackoftherequisiteco-ordinationbetweenthebanksandFIsparticularlywheretheyarejointfinanciersoflargevalueprojects.(ItisrecognisedinthisregardthatpursuanttotherecommendationsoftheWorkingGrouponHarmonizingtheroleandoperationsofDFIsandBanks[ChairmanShriS.H.Khan],a StandingCo-ordinationCommittee hasbecomeoperationalsinceOctober1999undertheaegisofIDBIandselectFIsandbanksarerepresentedontheCommittee).Suchjointlyfinancedprojectsalsogiverisetocertainoperationalissueswhich,itisfelt,canbebetteraddressedthroughamoreeffectiveandcloserco-ordinationbetweenthetwosetsoflendersviz.,thebanksandtheFIs.
Inthisbackground,theGovernor,ReserveBankofIndia,hadtakentwomeetingsofselectFIsandbanks,thelatteroneon7November2000;theminutesofthemeetingweresenttotheparticipantson24November2000.ItwasdecidedatthemeetingthatwhilethematteroftreatmentofrestructuredaccountsforassetclassificationpurposeswouldbeexaminedbyRBIasaregulator,oncertainotherissuesofmutualinteresttotheFIsandbanks,adraft"nonpaper"wouldbepreparedtofacilitatefurtherdiscussioninthematteramongthebanksandtheFIs.Accordingly,thispaperseekstoraisethefollowingissuesforcommentsfromtheselectbanksandtheFIs:
∙Delayinsanctionofvariouscreditfacilities
∙Assetclassificationacrossconsortiummembers
∙Discipliningborrowers-changeinmanagement
∙Levyofchargesinproblem/restructuredaccounts
∙ImplementationofGroupApproachforborrowers
∙Sharingofsecuritiesandcashflows-Trust&RetentionAccount(TRA)mechanism
2.Variousaspectsofeachoftheforegoingissuesarebrieflydiscussedinthefollowingparagraphsinordertofacilitatetheformulationof"groundrules"oracodeofconductbybanks/institutions.
(a) Delayinsanctionofvariouscreditfacilities
OneofthereasonsforthemountingNPAsintheIndianfinancialsectorisstatedtobetheinordinatedelaysinsanctioningcreditfacilities,particularly,underprojectfinancing,
wheresubstantialquantumofcostoverrunneedstobefinancedbythemembersoftheconsortiuminrespectof"lastmile"projectsorinothercasesinvolvingrestructuringorrehabilitationofaccounts.Thedelayarisesgenerallyonaccountoflackofco-ordinationandconsensusamonglendersonfinancingtheamountofcostoverrunorrestructuringorrehabilitation.Attimesthedelaysalsoariseforwantofcommitmentforworkingcapitalfacilitiesfromthebankersthoughthetermlendingfortheprojectmighthavebeenfullytiedup.Thisinturndelaystheoperationalisationoftheproject.
Theissuesraisedinthisregardare:
(a)theintroductionoftheconceptofsupermajoritywhosedecisionshouldbebindingonallthemembersoftheconsortium,and(b)thetimeframewithinwhichtheentirecreditprocessingfornewaswellastheexistingprojectsincludingoverrunfinancingshouldbecompleted.Thevariousramificationsoftheseissuesarediscussedbelow.
Aviewhasbeenexpressedthattoobviatedelayinfinancing,thedecisionshouldbetakenasperthe"supermajority"oflendersthatshouldbebindingonallthemembersoftheconsortium.Supermajorityinsuchcasesissuggestedtobethesecuredcreditorswithmorethan70percentshareintotallending.Itisalsosuggestedthatintercreditoragreementmightalsobenecessaryinsuchcasestomakethesupermajoritydecisionlegallybindingonallthemembers.Acontraryviewhasalsobeenexpressedthattheconceptof"super-majority"shouldnotbeimposedonthedissentingminorityintheconsortiumsinceinprojectfinancingthebanks,asworkingcapitalproviders,wouldalwaysbeinminorityand,therefore,wouldnotbeabletosafeguardtheirinterests.Further,itwassuggestedthatincaseofoverrunfinancing,theshareofthedissentingminorityshouldbefrozenattheexistinglevelsandanyfurthercontributionrequiredfromtheminorityintheoverrunfinancing,shouldbecontributedbythemajorityitself.Asavariationtothisview,itwassuggestedthatinconsortiawhereasinglelenderholdsmorethan30percentshareofthetotallending,thedecisionbyasimplemajoritycomprising51%shareintotallending,shouldsufficeandshouldbetreatedasbindingonallthemembersoftheconsortium.
Onexaminingtheaboveviews,thefollowingapproachmaybeappropriate:
a.Asregardsthetime-frameforsanctionoffacilities,itisfeltthatinthecaseofaccountswhereonlytwolendersareinvolved,anyissuesrelatingtosanctionoffacilitiesshouldbeexpeditiouslyresolvedbymutualdiscussionsbetweenthem.
b.Incasewheremorethantwolenderswereinvolved,theiragreementordisagreementforsanctionoffacilitiesmustbeconveyedwithinamaximumperiodof90daysfromthedateofreceivingloanapplications,completeinallrespects.
c.Incaseoffreshloanproposalsinvolvingmorethantwolenders,thesanctionorrejectionshouldbeconveyedwithinaperiodoftwomonthsfromthedateoftheappraisalnotebythelenderswhichhadinitiallyagreedin-principletoparticipateinthefinancing.
d.Incaseofaccountsinvolvingrestructuring,theleadinstitutionsshouldcompletetherestructuringprocesswithinthreemonthswhiletheotherparticipatinglendersshouldconveytheirdecisionwithintwomonthsfromthedateofreceiptofappraisalnote
(b) Assetclassificationacrossconsortiummembers
InthedayspriortothederegulationoftheIndianfinancialsystem,theReserveBankhadprescribeddetailedguidelinesforfinancingofborrowersunderconsortiumarrangement.Oneoftheprescriptionsofthoseguidelineswasthatallthemembersshouldfollowtheassetclassificationoftheleaderoftheconsortiumregardlessoftheperformanceoftheaccountintheirownrespectivebooks.However,withprogressivederegulationandliberalisationofthebankingsectorandrealisingcertainanomaliesintheaforesaiddispensation,ReserveBankstipulatedthatinconsortiumfinancingeachlendercouldclassifytheassetaccordingtotherecordofrecoveryinitsownbooksregardlessofassetclassificatio
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