Delink financial institution loans from on-lending to group cos: RBI tells Tata Sons

After months of negotiations with the Reserve Financial institution of India, Tata Sons is alleged to have labored out an answer which can not solely assist the tech to FMCG behemoth keep away from the requirement for necessary itemizing but in addition shun the non-banking finance firm – higher layer (NBFC–UL) classification. Based on sources, RBI has requested Tata Sons to delink the ‘on-lending’ tag on its financial institution borrowings.

This may imply that financial institution borrowing by Tata Sons, the holding firm of Tata Group, be absolutely repaid.

In a presentation made to the regulator on the way it plans to cut back these loans, Tata Sons has sought 12-18 months’ time to adjust to the regulator’s ask. An e-mail despatched to Tata Sons remained unanswered until press time.

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Drawback with on-lending

For banks, collaterals supplied, and finish use of loans are essential features that are intently monitored.

In Tata Sons’ case, high quality of collaterals isn’t a priority given the positioning of Tata Consultancy Providers. Nevertheless, by advantage of being a holding firm, and extra particularly, a systemically essential non-deposit taking core funding firm (CIC) with no earnings producing operations of its personal, loans availed by Tata Sons are largely to assist its group corporations which can haven’t been in a position to entry financial institution borrowings simply and/or at profitable rates of interest availed by Tata Sons. Finish use of such loans is tagged as ‘on-lending’.

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In FY23, Tata Sons’ mortgage excellent stood at roughly ₹21,000 crore. Whereas on-lending was a prevalent company finance observe for holding corporations, banks have turned cautious on these loans submit the 2015’s asset high quality disaster.

“This (on-lending) in the end results in layers of debt and an enormous asset – legal responsibility mismatch thus posing systemic dangers,” explains Ankita Singh, company lawyer and founder, Sarvaank Associates. If such loans are squared off with banks, the perceived danger in Tata Sons mortgage obligations might cut back. “Reorganising debt and ceding management could be checked out for sidestepping the on-lending tag and keep away from the stringent CIC-upper layer NBFC laws,” Singh provides.

Remedial steps

The latest 0.65 per cent stake sale in TCS by Tata Sons is believed to be a step within the course of remedying the scenario. Consultants, nonetheless, imagine that the problem could also be for group corporations that are assessing financial institution loans by means of Tata Sons to straight get a superb deal out there. “That is why Tata Sons has sought time to unwind the loans,” stated an individual conscious of the scenario.  

In October 2022, when scale-based regulatory framework was launched for NBFCs, Tata Sons was labeled as NBFC-UL regardless of being a CIC due to its publicity to financial institution loans and inter-corporate advances.