This is a clear departure from the past, when banks lending working capital kept a charge on current assets while the term-lending institutions did the same with fixed assets. This mutually-exclusive arrangement has become an irritant to credit growth in the context of the emergence of universal banking, where banks are trying to lend for longer maturities, and the institutions are growing assets by offering working capital. Recovery of assets also poses legal hurdles in such a scenario.

To speed up the delivery process and streamline the entire credit market, banks and institutionshave decided to frame common guidelines and create a pari passu (ie, proportionate) charge on all assets, a senior banker said. The Reserve Bank of India brass will meet chiefs of banks and institutions to frame the guidelines later this week. Says one top-level institutional source: "The joint approach will immensely help corporates. Even though banks and institutions lend from the same platform when they form a consortium, the divide between working capital lenders and term lenders is never obliterated. Even if banks offer term loans, they can only get second charge (on fixed assets) and that too only if the institutions issue a no-objection certificate. The same holds true about institutions offering working capital loans, leading to enormous delays in credit delivery. Now everything will, hopefully, be streamlined."

The problem has developed an urgency of its own with the financial institutions making aggressive forays into short-term working capital lending. "The institutions disburse corporate loanswhich are essentially used to supplement working capital and yet they want the first charge on fixed assets as a condition to disbursing these loans. Banks have, for their part, refused to give no-objection certificates as corporate loans can only create current assets and hence the institutions cannot have first charge on fixed assets (by giving corporate loans)," says the executive director of a public sector bank.

Representatives of banks and institutions have had a series of meetings to sort out the issue and the outcome of these meetings is simple: both the financial intermediaries should hold pari passu charge on current as well as fixed assets, taking a giant step towards universal banking. The RBI meeting later this week will formally put in place the guidelines.

"For corporate India this is the best thing to happen. It will speed up the credit delivery process as the main reason why banks were delaying the release of working capital loans was the delay on the part of the institutions inregistering a second charge on fixed assets in favour of the working capital lenders," said the finance director of a Mumbai-based company.

From the banks' and institutional point of view, it will simplify the loan documentation process and "deny the borrower a chance to play one financial intermediary against another".

In the case of sticky loans, banks and institutions can take joint action and hasten the legal process by virtue of holding common charge on all assets.

Insight
Towards universal banking

Once banks and financial institutions agree to take pari passu charge of all assets, it would be a great step towards universal banking. Market forces are ensuring that the old lines between working capital and term lenders are getting blurred, and documentation and charge creation will follow suit. Speaking practically, however, a pari passu charge on fixed assets will be more than welcome to working capital financiers, as a charge on current assets is for all practical purposesuseless. Current assets can be easily sold off and funds diverted, and in any case the lengthy legal process leads to stocks becoming worthless. Fixed assets like plant and machinery cannot be so easily removed, and last longer. So banks will gain by the pari passu arrangement.

Manas Chakravarty