While the discussion on bank lending arrangements to large corporates is an ongoing one, the recent addition is finding a fair value of assets, especially in distressed ones.
Though consortium and multiple banking arrangements have been in vogue for quite some time, they have not been successful on many counts. While the underlying principle of these arrangements is sharing of risk among participating banks, there is delay in tying up of funds from all participating banks due to their varying risk appetites and balance sheet strengths. The delay causes cost and time over runs, impacting the overall viability of the project.
In order to address this, a system that is in place in US can be emulated. The big four or five banks such as JP Morgan, Bank of America Merrill Lynch, Goldman Sachs and Citi with underwriting capabilities and balance sheet size provide bridge loans ensuring availability of funds to projects without delay. Once the funds are tied up, the broader syndication by participation from other relatively smaller banks is arranged to take out the bridge loan, while a minimum amount is held by these banks. While the main source of revenue for the big banks is fee income, the smaller banks rely on interest income as they tend to hold the loans till maturity.
Balance sheet size
Big banks do not draw comfort from increasing balance sheet size which has its own intrinsic risk factors. Instead they sell their portfolio to invest in upcoming projects, which checks their balance sheet size and the corresponding capital cost. Smaller banks can draw comfort from underwriting standards of bigger banks, though they are required to carry out their own independent evaluation. In both instances, boosting the bottomline is the driving factor and not increasing balance sheet size. So India should have a few big banks with capabilities to underwrite big projects, along with a number of smaller banks which can take up the exposures sold by these bigger banks, at a later date.
Further, secondary market trading of loans has to be opened up in India to provide liquidity to the market. In such a scenario, various factors such as asset quality, credit metrics, cash flow visibility, sponsor strength, industry cycle and government policies would reflect in the price of the loan. This would enable the banks to pick and choose assets that match their varying risk profiles and return requirements. This would also help banks to exit from exposures which they are not comfortable with, which can be picked up by other banks, similar to what happens on equity markets. The government and the RBI with participation of banks should work closely to start trading of loans, with suitable legal provisions in place. Similarly, given the present problem of distressed assets, arriving at fair value for them is a challenge. The current methods followed are open to litigation, further delaying the resolution process and recycling of stuck funds, impacting the overall economy.
Opening up a secondary market for loans coupled with development of distressed debt market would be an ideal solution to bring in liquidity to the market while arriving at fair value. As the price discovery would be market driven, it would be binding on all the involved parties and cannot be subject matter of litigation. After all, ‘Market is the Master’.
The writer is V-P (Syndications), SBI, US Operations, New York. The views are personal