Mumbai, November 22, 2017

Banks have written to Sebi to clearly define the type and duration of default when it releases revised guidelines on loan default disclosure

Banks have written to the markets regulator to clearly define the type and duration of default when it releases revised guidelines on loan default disclosure, four people aware of the development said on condition of anonymity.

In August, the Securities and Exchange Board of India (Sebi) mandated that listed companies disclose all loan defaults within a day. It withdrew the directive on 30 September, just a day before it was to take effect.

“Unlike bonds, where default is related to coupon and principal payment, loans are all running accounts. There are different types of fund-based loan accounts. And then there are non-fund exposures such as letter of credit, bank guarantees,” one of the people cited above, a senior official with a large state-owned bank, said.

“In most cases, we have a three-day grace period for servicing of interest. Hence, the circular should clearly mention what is default,” said the person on condition of anonymity.

Sebi hasn’t said when it intends to issue a revised circular. On the sidelines of an event last week, Sebi chief Ajay Tyagi said banks needed further time to examine the issue.

Bankers said that the revised circular must clarify if a disclosure should be made after taking into the account the grace period.

This is because in the current context, a payment delay by a day or two is not unusual, especially in cash-flow based accounts such as the cash credit facility, a short-term working loan given to meet the shortfall in working capital requirements.

In case of term loans, there are instances of delayed payments but the account is regularised within 90 days, they said. RBI norms classify loans as non-performing only if there are dues pending beyond 90 days.

Typically, most companies don’t keep idle cash on their books and hence, in case of a cash flow mismatch, there is no immediate money available for repayments, said bankers.

“This will have problems from top-notch corporates to right up to mid- and small-sized companies because nobody has ready cash available. If the delay in loan repayment was because the cash was stuck somewhere and I disclose this, then it is unfair to the borrower. My bank’s capital will also be hit because the rating will then be cut to D (default) and we will have to make higher provisioning,’ said the second of the four people cited earlier, an executive director of a mid-sized PSU banks.

On the sidelines of an event on 17 November, Rajnish Kumar, chairman of State Bank of India, said the circular must be in sync with the loan covenants that are followed in the country.

“The issue was with one day’s default. Our covenants are not like that. For example, we give three days’ grace period for servicing of interest. Will it then be advisable that if the interest is not serviced for even a single day, (it) becomes a default? (That) has implications on the lending practices, the covenants with the borrowers and the system of lending itself,” he said.

Bankers also said that as and when the regulator decides to implement the circular, it should be done in phased manner. Some banks suggest that it could start with mandating disclosures with companies based on their exposure to the banking system.

Others believe that till the time the teething problems with the GST, which has impacted cash flows of companies, particularly small and medium enterprises, are sorted out, Sebi should not mandate such disclosures on default. An email query sent to Sebi remained unanswered.

"We are not ruling out any of the suggestions from the industry and bankers. If a granular definition of default helps in bringing in transparency, then we will consider in that direction,” a Sebi official, who declined to be named, said.

According to Sandeep Parekh, managing partner of Finsec Law Advisors, the suggestions by bankers are valid.

“Besides (being) an administrative nightmare, this information adds to confusion which is irrelevant and unnecessarily alarmist. While disclosures and transparency are missing today, a crude disclosure standard will be worse than no standard," he said.