Wary SBI may play safe with troubled borrowers

MUMBAI: The arrest of former bankers who had approved loans to Vijay Mallya’s Kingfisher Airlines will hold back India’s largest lender State Bank of India (SBI) from throwing a lifeline to a troubled company and proactively rejigging loans to give a business house a second chance.

In the course of meetings that followed last week’s highprofile arrests by the Central Bureau of Investigation, the state-owned high-street bank has chosen to let future restructuring of corporate loans be decided through proceedings under the bankruptcy code.

Banks often come together to lower interest charge, convert debt into equity, and stretch loan repayment period to help borrowers tide over difficult times and deal with failed businesses.

But with bankers who had approved loans to Kingfisher being taken into custody, bank employees want to ring fence themselves against actions taken by government enforcement agencies probing loan defaults and alleged money laundering by Mallya.

“Apublic, transparent process of loan restructuring, approved by the National Company Law Tribunal (NCLT), cannot be questioned. It may not be the best solution, but we don’t have too many choices,” said an SBI official. NCLT passes orders for insolvency resolution after a creditor initiates proceedings under the bankruptcy law.

A few days ago senior officials of the bank met partners of a leading law firm in Mumbai to explore the option of invoking the bankruptcy code for some of the large stressed loan accounts.

“Not all banks, particularly some of the private lenders, may agree with SBI. But banks will soon meet to discuss the way forward for the industry in the aftermath of the arrests,” said another banker.

Among other things, dealing with stressed borrowers and mode of loan restructuring is likely to crop up when bank chief executives meet on February 1 as managing committee members of the Indian Banks’ Association, a bank lobby. Under the bankruptcy code, a loan restructuring plan is prepared by an ‘insolvency practitioner’ — whose appointment has to be cleared by NCLT — in consultation with banks.

Within 180 days of NCLT passing an ‘insolvency resolution order’, the practitioner takes possession of the assets of the defaulting company, takes over the management, runs it as a going concern, and collects data from the company and banks to formulate the restructuring plan which becomes operational after three-fourth of the banks agree. If the plan is rejected, NCLT orders liquidation of the company and the insolvency practitioner is appointed as the liquidator. According to regulations, the secured creditors can take possession of the pledged and mortgaged assets to sell them and recover a part of their dues.

“A bankruptcy proceeding is perceived as an avenue to force a truant borrower to fall in line, though it’s not the best way for banks to salvage most of their money,” said a senior lawyer. Lenders know that the seemingly powerful law is not entirely free of hurdles.

Indeed, one of the borrowing companies recently moved the high court to challenge the bankruptcy law that allows a lender to kick off the bankruptcy process (by filing a petition for insolvency resolution before NCLT) without serving a notice on the borrower. But it appears the immediate priority for many banks is to take refuge in the new law to shield their reputation and raise a wall of immunity against actions of law enforcement agencies. More so, with the arrest of former IDBI chairman Yogesh Aggarwal and four other officials coming just days after a DRT ruled in favour of SBI-led lenders’ consortium for recovering more than Rs 6,200 crore from Mallya.