RBI Lets Banks Exit CDR By Sale Of Assets

Mumbai, January 28: | Updated: Jan 29 2003, 05:30am hrs
Foreign and private banks appear to have reached an agreement with the Reserve Bank of India (RBI) on the contentious issue of these banks joining the corporate debt restructuring (CDR) mechanism. The RBI has agreed to give banks an exit option in case they are not willing to pump in additional funds as may be decided by the majority.

This review has come in view of concerns of foreign banks and a few private banks which have not yet signed the agreement. However, it will be applicable to all the banks which are a part of the mechanism, top bankers told FE. An RBI spokesperson declined to spell out details of the agreement.

The exit option is expected in the form of banks being allowed to sell their portfolios in cases where they do not want to increase their exposure according to the CDR decision. Guidelines of the new provisions, which are expected shortly, have been developed in consultation with a cross-section of bankers.

Earlier, foreign banks had sounded off their head-offices over CDR voicing concerns that it is a coercive step and were seeking internal go-aheads before becoming a signatory to the CDR mechanism.

The concerns of foreign banks were as follows: they see no point in (a) taking on incremental exposure mostly sub-standard at that to companies or groups with whom they have already severed ties, thereby putting pressure on capital (b) joining 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.

A few private banks had voiced similar concerns and have still not signed up with the CDR mechanism. The main bone of contention is that foreign banks are primarily short-term working capital lenders and are not in favour of pumping in additional funds into companies through the route.

No bank can be forced to pump in more 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, a foreign banker had told FE.

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, said a source.