India's public sector banks (PSBs) are losing valuable lead banking relationships with the country's largest companies while attempting to rid their balance sheets of huge volumes of non-performing assets (NPAs), says a report.
In its 2019 study, Greenwich Associates, a market intelligence and advisory services provider, says, "...even when public sector banks do retain their status as a company's No. 1 or No. 2 credit provider, they are being cited less often as leading providers in non-credit products such as foreign exchange and cash management-roles that are being filled most often by private sector banks. The one outlier to this trend is State Bank of India (SBI), which has moved faster and made more progress than other PSU banks to address the NPA issue, actually increased its share of lead corporate banking relationships to 6% of large companies in 2018 from 4% in 2016. SBI has also posted dramatic gains in cross-selling foreign currencies and trade finance to companies for which it is a top credit provider."
"Even after recent mergers, it's apparent that the PSU banks need to consolidate in order to achieve the scale needed to compete as well as ensure that banks are investing in people, platforms and technology to effectively compete in the future," says Gaurav Arora, Greenwich Associates' head of Asia.
As of 2016, 20% of large Indian corporates participating in the Greenwich Associates annual Corporate Banking Study said they used at least one PSU bank as a lead corporate bank. By 2018, that share had fallen to just 15%. The bulk of those relationships went to private sector banks, Greenwich Associates says.
The market intelligence and advisory services-provider estimates that 92% of Indian companies will make a change to their corporate banking rosters in 2019. Ït says, "That shift is having a major impact on the competitive landscape for India's leading corporate banks. The 2019 Greenwich leaders in Indian large corporate banking are navigating a stressful and volatile period of transition, as the consequences of long-needed reform ripple through the marketplace. HDFC Bank and SBI top the list of local banks. Each is used for corporate banking services by roughly three-quarters of large Indian companies. Close behind is ICICI Bank, with a market penetration score of 71%. These three banks also secure the top spots among middle market banking companies, with HDFC in first place and ICICI and SBI statistically tied in the No. 2 spot."
"In terms of quality, HDFC has differentiated itself from all competitors to claim the title of 2019 Greenwich quality leader in both large corporate and middle market banking. Among foreign banks, Standard Chartered Bank and Citi are tied statistically with a market penetration of 51%-54% among large Indian corporates, followed by HSBC at 50%. In the middle market space, among foreign banks, HSBC ranks first and Standard Chartered in second and Citi a close third."
Given the current dynamics of the industry and the priorities of the new government, Greenwich Associates says it is becoming increasingly clear that restoring India's banking system to health is a priority. "The potential implications could range from privatization/consolidation, to setting stronger corporate governance structures, to guidance on technology infrastructure upgrades. But weak balance sheets and other immediate challenges are preventing PSU banks from making the long-term IT investments needed to compete for wholesale banking business in the future," it concluded.
On 4th July, instead of a celebratory statement at successfully navigating the penultimate hurdle in its bid to acquire Essar Steel, Arcelor Mittal issued a cryptic one-line press release: “We note today’s ruling by the NCLAT (National Company Law Appellate Tribunal). We need to review the full written order to understand any implications on completion of the transaction.”
The ruling is not shattering for Arcelor Mittal. Having run the gauntlet of innumerable legal challenges by the Ruia group, it is clearly prepared for the issue to go up to the Supreme Court (SC) for a final verdict.
However bankers, who have been waiting for over 530 days and counting, are preparing to challenge the order in SC.
The reason? The NCLAT order has puts secured and unsecured creditors almost on par. It suggests that lenders of secured loans do not have drastically superior rights to the money from the resolution process; they will have to share it more equitably with operational creditors as well.
Bankers argue that the judgement is disastrous because it calls into question how credit markets work and how risk is priced.
There is, indeed, great merit in this view and I started out agreeing with it. However, applying it rigidly, without taking into account the peculiarities of the Indian situation, would also be grossly unfair to operational creditors.
The story would have been different if banks had been prudent about their lending practices, not turned a blind eye to rampant diversion of funds, giving in to ‘phone’ calls from Delhi to allow repeated debt restructuring (with no claw back), massive write-offs, permit interest outstanding to pile up and, right at the beginning, turn a Nelsons’ eye to a massive padding of project costs.
One banker told us how a Rs800-crore project had been inflated to Rs1,300 crore and then to Rs2,000 crore in a group company by one of those involved in this very litigation. Banks, usually public sector banks (PSBs), have been complicit in this mischief.
We have also seen how PSBs lent over Rs15,000 crore to Prashant and Ravi Ruia in Essar Investments against personal guarantees that are not backed by any significant security.
Should operational creditors, who play a critical role in keeping the businesses running, pay a bigger price when the corrupt nexus between bankers-business-politicians goes unpunished?
Justice SJ Mukhopadhyaya’s order on 4th July has refused to allow the committee of creditors (COC), comprising bankers and asset reconstruction companies, to corner almost the entire Rs42,000 crore offered by Arcelor Mittal. The order disposed a large number of petitions, including those of a wide spectrum of operational creditors, whose continued association with the company after the resolution process began has kept Essar Steel going.
The NCLAT order, in deciding to safeguard the rights of the operational creditors (including workmen, employees, and the large number of trade- and services-related creditors) notes that they are larger in number than financial creditors and are not fully listed. It asks the COC to take help from a professional and ensure distribution based on the percentage decided by the bench. This has been provided in a tabulated form.
There was another issue which is, in fact, to the credit of operational creditors who kept the company going and even earned a profit. Financial creditors had argued that the reason why ‘operational creditors’ were not assigned any claim in the resolution process was because they had done “business worth Rs55,000 crore during the pendency of the resolution.”
There was also a discussion on how the profit earned during the pendency of resolution should be distributed; both financial creditors as well as the bidder, ArcelorMittal had laid a claim to it.
The NCLAT order asks the RP (resolution professional) to file an affidavit providing details of this profit and distribute it among all financial and operational creditors on a pro rata basis.
There is, however, one legitimate issue that needs to be clearly resolved. A person familiar with the resolution says, “the order has left open a path for those trade creditors, not settled by this order, to renew their claims after the deal closes and Arcelor Mittal takes over Essar Steel. That would pose a huge problem, because the aggregate number of trade creditors, by value, is large. If the order does not provide for a clean break and clear acquisition, Arcelor Mittal could end up paying a higher cost and remain engaged in endless and expensive litigation.”
That would cast a huge shadow on the entire IBC (Insolvency and Bankruptcy Code) process for larger companies, especially at a time when the long delay and never-ending litigation in Essar Steel is a matter of great embarrassment for the government which had promised swift resolution.
While we wait for the Supreme Court to clarify issues raised by the NCLAT order, it is important to note that the IBC has evolved and been amended fairly quickly to plug loopholes and provide clarity on issues while taking into account the Indian reality.
In November 2017, after the very first and flawed resolution of Synergies Dooray Automotive Ltd, Debashis Basu wrote in the Business Standard, “One of the many flaws of the badly drafted IBC and the whole new bankruptcy architecture is that it did not take into account the very Indian possibility that promoters (and others) will try to game the system in many obvious ways.”
IBC was amended twice since then. In 2018, it was amended to safeguard home-owners, who were left in a lurch by large realty companies, although they were making regular payments and held a signed agreement promising ownership to specific properties. The legislature, as well as the SC, backed them, despite vociferous protests and lobbying by lenders and builders who had argued that it would irrevocably damage the bankruptcy process. This issue is still open. Real estate companies have filed over 140 petitions challenging constitutional validity of this amendment.
Another amendment to Section 2 made the IBC applicable to personal guarantors of corporate debtors and proprietorship firms and Section 29 A was also inserted to prevent defaulters from bidding for their own assets.
In recent months, NCLAT and SC have both provided the much needed clarity with regard to statutory dues claimed by revenue agencies. In the past, exorbitant tax claims and litigation by revenue agencies had always played spoilers to any corporate resolution.
In the Monnet Ispat case, SC (August 2018) held categorically that provisions of Section 238 of IBC will override anything inconsistent contained in any other enactment, including the Income-tax Act.
In the Raj Oil Mills case, NCLAT, in a combined order (March 2019), decided that all statutory dues owed to revenue agencies would be treated as operational debt.
The order said, “As the income tax, value added tax and other statutory dues arising out of the existing law arises when the company is operational, we hold such statutory dues has direct nexus with operation of the company. For the said reason also, we hold that all statutory dues including ‘income tax’, ‘value added tax’ come within the meaning of operational debt.” It, however, allowed these agencies to initiate the resolution process to recover their dues.
A final resolution of the Essar Steel case is important, not only to set at rest issues raised by the 4th July NCLAT order, but also to signal that resolution provides a better alternative to liquidation, which will entail far bigger losses to lenders.
Indian PSBs’ bad loans stand at a massive Rs10 lakh crore+ and the NCLT is already bogged down with just 1,860 companies admitted for resolution so far, while an estimated 12,000 more await admission.
The task is humungous and it is important for everyone to ensure that it works at a time when several distressed asset companies from around the world remain interested in acquiring Indian companies and can provide an exit to our beleaguered lenders.
The Delhi High Court on Tuesday asked Jet Airways promoter Naresh Goyal to submit Rs 18,000 crore in bank guarantees in order to be allowed to travel abroad.
"If you can give Rs 18,000 crore as bank guarantee, then you can go," said Justice Suresh Kait while refusing to grant interim relief to Goyal
During the course of hearing, senior advocate Maninder Singh who appeared for Goyal argued that the Look Out Circular issued against his client is illegal as it is not issued under any law enacted by the Parliament.
The Centre, through Additional Solicitor General Maninder Acharya, told the court that allegations of serious frauds amounting to Rs 18,000 crore are being investigated against Goyal.
Citing the reasons for his visit abroad, Goyal, through his counsel, told that court that he needs to explore financial options for the airlines which is under a serious financial crunch.
Singh further submitted that Goyal is an NRI and is a resident of Dubai and hence, he needs to go back to the country before July 10, else his residential rights would be revoked.
On July 5, Justice Vibhu Bakhru recused himself from hearing the case.
On May 25, Goyal and his wife Anita Goyal were stopped from leaving the country by immigration authorities at Mumbai airport.
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