If public sector banks have collectively given a company a project loan, which then turns sour, they should not break ranks and sell the loan piecemeal to asset reconstruction companies (ARCs), according to the Finance Ministry.
Instead, they should sell the ‘consortium loan’ lock, stock and barrel to an ARC or a consortium of ARCs.
Strength in numbers
The ministry believes that collectively, public sector banks (PSBs) can realise better pricing on the sale of a project loan given in consortium rather than by doing so singly. A project loan is given by lenders to finance new projects as well as for expansion, diversification and modernisation of existing ones in infrastructure and non-infrastructure sectors.
At a meeting of bankers, ministry mandarins suggested that when it comes to consortium loans that have turned bad, PSB officials, under the aegis of the joint lenders’ forum (JLF), should act together to take a call on sale of such loans to ARCs.
Further, even if one bank in a consortium wants to sell its portion of the loan, the JLF needs to be convened.
Why some PSBs go it alone
A senior PSB official observed that there could be a variety of reasons why banks currently don’t collectively sell an asset that has been financed in a consortium: for instance, it could be because it impacts each of them in different ways.
“For example, for one bank, a ₹500-crore loan exposure may account for 1 per cent of its loan book, whereas for another bank it could be just 0.001 per cent. So, the former could think of its exposure a little differently in terms of the overall impact and may want to sell its part of the exposure quickly to get cash and securitised receipts,” he said.
Another reason why some banks hesitate to sell consortium loans together could be that they may have different security interests. The banker quoted above elaborated: “Their security packages may be different. Somebody may have exclusive security. I can’t put that in a pool and get paid on an average basis. I would prefer to sell that bilaterally. So, there could be variety of reasons why banks don’t a act together.”
Another public sector banker said the ministry’s suggestion, if implemented faithfully, could yield better price discovery and higher realisation for consortium loans on the block.