What is loan default? Banks write to Sebi seeking a clearer definition
Banks have written to the markets regulator to clearly define the type and duration of default while releasing 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 September 30, 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 types of fundbased loan accounts. 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 stateowned bank, said. “In most cases, we have a three-day grace period for servicing of interest. Hence, the circular should clearly menflow tion 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 shortterm working loan given to meet the shortfall in working capital needs. In case of term loans, there are instance of delayed payments but the account is regularised within 90 days, they said.
Reserve Bank of India (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 mismatch, there is no immediate money available for repayments, said bankers.
“This will have problems from top corporates to mid- and smallsized 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.
Bankers also said that as and when the regulator decides to implement the circular, it should be done in phased manner.
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.
MUMBAI: