FinMin not in favour of immediate disclosure of term loan defaults to bourses

The finance ministry is not in favour of the Securities and Exchange Board of India’s proposal that listed companies should inform the stock exchanges as soon as they miss payment of monthly instalment on a term loan, sources told Moneycontrol.

The matter of disclosure of loan repayment defaults was discussed at the SEBI board last week.

The regulator had proposed that listed companies disclose a default on working capital loan within 30 days from the date of missing a payment, and that default on a term loan should be made within one working day.

With the finance ministry officials on the SEBI board not in favour of SEBI’s proposed disclosure rule for term loan default, no decision was taken on defaults on either of the loans.

If a company misses a monthly repayment instalment, it is technically a default even though the bank will still treat that loan as a standard asset. It is only when the company does not make payments for three months in a row that the bank will have to classify the loan as a non-performing loan.

From a stock investor’s perspective, even a single miss on repayment is crucial information as it highlights the strain on the company’s financials.

But banks and corporates argue that immediate disclosure of a loan instalment miss could aggravate what may be a temporary situation.

For instance, promoters routinely pledge shares and raise money. The disclosure of default to stock exchanges could trigger a sell-off in the stock. This could lead to promoters facing margin calls from the borrowers with whom they have pledged shares. An erosion in the value of the shares could narrow the promoters’ options to raise fresh funds. Also, a default may make other banks wary of lending to the promoters.

The finance ministry’s worry is prompt disclosure of term loan defaults could harm banks — especially state-owned banks — which are just recovering from the NPA calamity that has hit the sector.

The finance ministry officials on the SEBI board proposed that disclosures of term loan defaults be made in a phased manner.

In the first phase, companies which had not paid the banks for 90 days be named, in the second phase, companies which have not paid banks for 60 days be named, and in the last phase, companies which have not paid banks for 30 days be named.

Also, the officials said that SEBI should first enforce the disclosure rules by credit rating agencies, approved in June.

Under the rules, the credit rating agency shall seek a ‘no default statement’ from the issuer at the end of each month, stating that the issuer has not delayed on any payment of interest or principal in the previous month.

If the issuer fails to provide the statement, or mentions that it has delayed in repaying the bank, the credit rating agency will have to inform the stock exchanges within two days.

Bankers have reservations about immediate disclosures citing impact on other lenders for underwriting, credit and recovery decisions and on the corporates’ market position and commercial decisions thereafter.

A senior Bank of Baroda executive said, “Many a time business requirements and situations change. So the cash flow mismatches are a common thing and we are not living in an ideal world, so maybe they need to define the default methods. It also hampers the underwriting processes for other loans as there is additional source of information which is good but raises more questions and corporates will be required to give explanations. However, I would say that the disclosure should be there but the immediate disclosure is practically a cumbersome process.”

Another senior large public sector bank official also opposed the rush for immediate notification of default across banks. “It (disclosure) is not required if there is a possibility of revival in the business. We should take a conscious call of calculating the risks. Ultimately disclosures to regulatory bodies becomes difficult to satisfy other lenders who have classified it as a performing loan at that time. It is a lengthy process of about 6 months to get the same status and position in the market. I think, the track record of the entrepreneur should also be looked at.”

Moreover, in March 2017, the Reserve Bank of had submitted a list of large loan default cases (more than Rs 500 crore each) to the Supreme Court in a sealed envelope, this was in response to a public interest litigation on rising bad loans in the economy. Many experts pointed out the need to disclose the names publicly. However, the central bank had declined to make the list public, citing economic interest, fiduciary responsibility and commercial confidence. The apex court is yet to decide whether the information can be made public or not.

In the SEBI board meeting, one of the officials recommended starting with private banks not to with public sector banks which are already in a bad shape.

SEBI wants to implement this because of clear the gap of asymmetry of information.