Foreign Banks Sound Off Head Offices Over CDR

Mumbai, December 24: | Updated: Dec 25 2002, 05:30am hrs
The Reserve Bank of Indias (RBI) recent move asking foreign banks to sign up for the corporate debt restructuring (CDR) mechanism has let loose the proverbial cat among the pigeons. Top-of-the-line foreign banks have sounded off their reporting head offices over CDR voicing concerns that it is a coercive step and are seeking internal clearance before becoming a signatory to the CDR mechanism. In effect, bigger foreign banks have thrown the ball in their parents courts for advise on how the situation should be tackled in the view of RBIs insistence that they join the CDR mechanism.

Senior foreign bankers said that we do not want to take on a confrontationist approach, but want to solve the issue through discussions. But the present set-up makes it difficult for us. We are waiting to hear from our head offices. Due to similar considerations, a few private sector banks have also not signed up for the CDR mechanism and have made their position clear to the RBI after intensive internal discussions, including at the board level.

The concerns of foreign banks are as follows: They see no point in (a) taking on incremental exposure mostly substandard at that to companies or Groups with whom they have already severed ties thereby putting pressure on capital (b) Joining the CDR when they have already provided for bad exposures in most cases on their balance-sheets and c) all signatories having pari passu charge over assets even on those that these banks have managed to get on an exclusive basis and to be put in a pool.

Sources said that matters have now come to such a point that we are hoping that the likes of Mr (Jaspal) Bindra and Mr (Sanjay) Nayar (who head the Indian operations of Standard Chartered Bank and Citibank respectively) will take up the issue with the regulators.

Intra-foreign bank equations are also at play here. It has been gathered that Mr Bindra and Mr Nayar have been pushed forward as there were reservations in some quarters over the manner in which BNP Paribas India-head, Jonnathan Lyon, represented issues before the central bank. Mr Lyon represents foreign banks under the umbrella of the Indian Banks Association (IBA).

In fact, the appointment of Mr Bindra to the CDR core group was one of the demands of foreign banks, and this was okayed a few days before the November 14, 2002 meeting with the RBI deputy-governor, GP Muniappan, when foreign banks were asked to sign up for the CDR mechanism.

The biggest bone of contention in the whole wrangle is the fact that foreign banks are primarily short-term working capital lenders (like most commercial banks) and are not in favour of pumping in additional funds into companies through this route.

No bank can be forced to pump in additional funds just because the majority of lenders decide that it should be done. Since foreign (or private) banks do not have enough exposure in any company to influence the decision which is taken by a 75 per cent majority, they have no voice, said a senior foreign banker. One hassle being sighted is that in most cases, assets have been classified as non-performing or substandard, and any further exposure, will directly result in the expansion of such portfolio. No one wants to throw bad money after good and in case banks do not agree to pump in additional funds, they will be put in a disadvantageous position in terms of security through the penalty clause in the inter-creditor agreement (ICA), sources said.

Earlier, foreign banks had asked the RBI to provide them with an exit option. They had also requested RBI to exempt cross-border loans from the CDR purview. Among other suggestions, deletion of ICA penalty clause had been sought; and that commitments for additional funding be left at the discretion of individual banks. For this purpose, foreign banks had suggested that term and working capital loans be treated differently and ICAs be timebound. They had also requested the RBI to allow transfer of assets to other non-signatories of ICA in case the party is willing to pick it up.