Large banks want that the ARCs which acquire loans to give an undertaking that they have no links whatsoever with the promoters of defaulting borrower companies – a legal declaration that would become particularly significant if any such company faces bankruptcy and is auctioned to a new owner.
Some of the big lenders are also refusing to sign the standard indemnity they give on sale of sticky loans to ARCs. Many fear this could become a deal breaker in the stressed loan market.
What has also put off many ARCs is the demand by some banks that even in full cash deals, the former should share a slice of the extra money recovered over and above the amount paid to buy the loan. Though irrational, banks are pushing this to avoid probe and questioning by the vigilance department when ARCs succeed in recovering a sizable amount from loans for which banks were paid a pittance.
In reference to section 29A of the Insolvency and Bankruptcy Code which aims to block wayward promoters from regaining control, banks have said ARCs must confirm “that they do not have any direct or indirect connections with the promoters/company/guarantors and/or any of their related parties,” pertaining to loans being assigned/transferred under this assignment agreement.
‘Practical problems’
This condition becomes relevant if the company in question later undergoes bankruptcy proceedings and the ARC owning the loans submits a resolution plan (which the law allows an ARC to do). An assignment agreement is the key document that a bank selling loans and an ARC buying the assets sign for every transaction. It ‘assigns’ all the rights which are with the banks to the ARC. “One can understand that a bank would not want an ARC holding the loans to act as a front and help a promoter make a backdoor entry into the company. But there are practical problems. This is a blanket undertaking and can be a problem for an ARC which had acquired loans under the Sarfaesi Act and carried out subsequent restructuring,” a legal expert aware of the matter told ET.The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Sarfaesi) was meant to empower banks to recover non-performing assets without the court’s intervention.
Finding a fix
“What is of greater and immediate concern for ARCs is the reluctance of a handful of big banks to sign the indemnity clause. It’s important we find a way out. We hear that a five-member group, comprising an official each from a large PSU bank, a large private bank, two ARCs, and the secondary loan market association would come out with suggestions,” said an official of an ARC.
According to bankers, once a loan is sold and leaves the books of the selling bank, the ARC (or the transferee) buying it should not have any recourse to the bank (or, the transferor.) “But what about the liabilities and losses an ARC later faces due to lapses on the part of the bank? What if a title deed is fake or some other document turns out to be fraudulent? Shouldn’t the bank make good the loss?” asked the ARC official.
When contacted, Hari Hara Mishra, CEO of Association of ARCs in India, was hopeful that the differences would be resolved. “Any standard agreement between two parties has to be acceptable in most areas, leaving few areas which could be bilaterally discussed based on commercial considerations. And with serious efforts in understanding the perspective of the other side, there is always scope for finding an acceptable agreement,” said Mishra who was a member of the committee that finalised the model Assignment Agreement in 2013.
Risk factor
ARCs either pay the entire amount in cash or make a part payment in security receipts (SRs), which are quasi-bond instruments while buying loans from banks. In case of SRs, an accepted framework for sharing the upside with banks is in place. However, ARCs find it unacceptable to share with banks the gains from recovery in loan deals where the full payment has been in cash and ARCs bear the entire risk of the asset.
Further, banks argue that the new assignment agreement must spell out that if a loan is declared a ‘fraud account’ later, the ARC which bought the loan would be responsible for continuous monitoring, and filing of complaints with law enforcement agencies and other statutory authorities. ARCs would have to maintain all proper records on the matter.
“However, when it comes to a fraud, there may be crucial documents like forensic audit and other information collected from multiple sources which are not part of the standard set of documents a bank gives when loan sale happens,” said an industry person.