Lenders turn cautious on fresh credit guarantees
HIGH RISK Banks anticipate more defaults owing to the ongoing pandemic
MUMBAI: Lenders are going slow on issuing fresh bank guarantees, anticipating a rise in counter party risks in the aftermath of the covid-19 outbreak, two senior bankers said requesting anonymity.
“Not only do banks have to ascertain if the delay (in project completion milestones) cited is because of the pandemic, we are also worried that the beneficiary will not acknowledge such delays even if they are genuine,” said the first banker cited above.
“Once (a guarantee is) invoked, the borrower has to pay a higher interest on the guarantee which then turns into a loan,” said the first person cited above.
Bank guarantees are a widely used non-fund based credit instrument in which the liabilities of a borrower are met by the issuing bank contract in the event of non-fulfilment of a contractual obligation.
While the borrower —either a legal entity or an individual—is the one who applies for a guarantee from a bank, the beneficiary can invoke the guarantee if the borrower fails to meet the terms of the agreement.
Currently, borrowers are charged a commission of about 0.25-0.75% of the value of the guarantee per quarter. Howe v e r , o nc e a g uar a nt e e is invoked, it turns into a fundbased loan on which the borrower has to pay the prevailing interest rate applicable, much higher than the quarterly commission.
Bank guarantees have a range of applications in corporate finance, including performance guarantees for new projects, bid bond guarantees and deferred payment guarantees.
According to the first banker, lenders are conducting a more thorough due-diligence when issuing fresh guarantees as well. “The quality of capital is one of the things we are looking into. There have been instances of promoters using unsecured loans as capital in some projects but we are not issuing fresh guarantees unless convinced about the quality of capital,” he said.
Total guarantees issued by banks stood at ₹11.42 lakh crore in FY19, according to the Reserve Bank of India’s report on trend and progress of banking in India published in December 2019. Shown as part of banks’ off-balance sheet exposure, public sector banks issued 46% of the total bank guarantees, followed by private banks at 39%.
The second banker said that while there are issues at present, not many guarantees are getting invoked because in many cases there is a force majeure clause in the contract. “If the beneficiary invokes the guarantee, the borrower can use the force majeure clause to stall the action. A clear picture is yet to emerge and we are waiting for it,” he said.
The i nt e nt i on of a f orce majeure clause is to save the performing party from consequences of something over which it has no control and typically includes an Act of God or natural disasters, war or war-like situations, labour unrest or strikes, epidemics etc., according to a note by law firm Cyril Amarchand Mangaldas in March.
The second banker added that they are trying to ascertain whether the beneficiaries are revising the contract period because of covid-19 and whether cost escalation is being factored into it.
“However, since bank guarantees stand at 10% or less for most banks, I feel lenders can handle it as soon as the covid-19 impact subsides,” he said.
NEW DELHI: India’s biggest gas importer Petronet LNG Ltd gave its outgoing chief executive Prabhat Singh a record 27% rise in remuneration in FY20 and has now begun a search for a new CEO on modified terms that made just retired executives of PSUS ineligible.
Singh, who completes his fiveyear term as managing director and CEO next month, took home a record ₹1.8 crore in fiscal 2019-20 (April 2019 to March 2020), according to Petronet’s latest annual report. This included ₹22.5 lakh commission on profit.
Petronet, which is registered as a private limited company but is headed by the oil secretary, had paid him a total of ₹1.4 crore in the previous fiscal.
The salary paid to the CEO of Petronet is much higher than that drawn by chairmen of its promoter PSUS, namely GAIL, IOC, ONGC and BPCL. Singh was appointed CEO of Petronet on September 14, 2015, and that year he took home ₹40.4 lakh (the remuneration for six-and-a-halfmonths). In the following year, he took home ₹1.08 crore.
Though Singh, 63, was eligible for an extension till he achieved superannuation age two years later, Petronet has begun a search for a new CEO. The company has invited applications from eligible candidates by September 9, according to a notice.
“The candidate should be aged minimum of 48 years and maximum of 60 years on the date of vacancy ie September 14, 2020,” it said. Also, the “applicant must, on the date of application, as well as on the date of interview, be employed in a listed company with a turnover of ₹5,000 crore or more,” it said. The ‘employment status’ was not an eligibility criterion when past CEOS including Singh were appointed, sources in the know said.