Delink bank loans from on-lending to group firms: RBI tells Tata Sons
TIME FOR REJIG. Move could help avoid upper layer NBFC tag; Tata Sons has sought 12-18 months window
After months of negotiations with the Reserve Bank of India, Tata Sons is said to have worked out a solution which will not only help it avoid the requirement for mandatory listing but also shun the nonbanking finance company – upper layer (NBFC–UL) classification. According to sources, the RBI has asked Tata Sons to delink the ‘onlending’ tag on its bank borrowings.
This would entail Tata Sons, the holding company of the Tata Group, fully repaying its bank borrowing.
In a presentation made to the regulator on how it plans to reduce these loans, Tata Sons has sought 12-18 months’ time to comply with the regulator’s ask. An email sent to Tata Sons remained unanswered till press time.
ON-LENDING ISSUE
For banks, collaterals oered and the end use of loans are critical aspects, which they closely monitor.
In Tata Sons’ case, the quality of collaterals is not a concern given the position of Tata Consultancy Services. However, by virtue of being a holding company, and more specifically, a systemically important non-deposit taking core investment company (CIC) with no income generating operations of its own, loans availed by Tata Sons are largely to support its group companies which may have not been able to access bank borrowings easily and/or at attractive interest rates. End use of such loans is tagged as ‘on-lending’. In
FY23, Tata Sons’ loan outstanding stood at approximately ₹21,000 crore. While on-lending is a prevalent corporate finance practice for holding companies, banks have turned cautious on these loans post the 2015 asset quality crisis.
“This (on-lending) ultimately leads to layers of debt and a huge asset- liability
mismatch, thus posing systemic risks,” explained Ankita Singh, corporate lawyer and founder, Sarvaank Associates. If such loans are squared o with banks, the perceived risk in Tata Sons loan obligations may reduce. “Reorganising debt and ceding control can be looked at for sidestepping the on-lending tag and steering clear of the stringent layer NBFC Singh added.
CIC-upper regulations,”
REMEDIAL STEPS
The recent 0.65 per cent stake sale in TCS by Tata Sons is believed to be a step in the direction of remedying the situation.
Experts, however, believe that the challenge may be for group companies which are assessing bank loans through Tata Sons to get a good deal. “This is why Tata Sons has sought time to unwind the loans,” said a person aware of the situation.
In October 2022, when scale-based regulatory framework was introduced for NBFCs, Tata Sons was classified as NBFC-UL despite being a CIC because of its exposure to bank loans and inter-corporate advances.