Source: ET Infra
“Players (ship owners and operators) find that registration and deregistration of mortgage is a challenge especially when you have multiple lenders; de-registration of the mortgage is equally a challenge. If somebody wants to sell the asset and recover the loan, it becomes quite challenging for them to do so. Some reforms are required there,” Suresh Swamy, Partner, Tax and Regulatory Services, Price Waterhouse & Co LLP, said at the ‘India Ship Finance Forum’ organised by Marine Money in Mumbai on 20 February.
M Suresh Kumar, Chief Executive Officer – Shipping, Bothra Group, concurs with this view.
“For the foreign banks, I think the enforcement and the mortgage issues, that is the biggest challenge. We have other jurisdictions where we have admiralty courts and ease of enforcement during defaults. In India, you continue to default and yet enjoy the control of the asset. This is a big challenge and I do not know when and how we should get over it. We are all aware of this and we have been talking about this for the last 15-20 years, (but) we have not made any progress. The banks and financial institutions who have come to IFSC GIFT City, they also look at this as a jurisdiction of India not as IFSC,” he stated.
The Great Eastern Shipping Co. Ltd, India’s biggest private ocean carrier, says this was a “real tough situation about 20-25 years ago”.
“We ourselves went out to educate some of the foreign banks on enforcement and the legal framework for enforcement in India. There have been quite a few foreign lenders who came in here and funded Indian ships,” G Shivakumar, Executive Director and Chief Financial Officer, The Great Eastern Shipping said during a panel discussion at the ‘India Ship Finance Forum’ organised by Marine Money in Mumbai on 20 February.
“In general, at least the banks that have worked in India in the past – this is again based on my limited experience dealing with those banks – they seem to be fairly comfortable with the Indian flag itself. It’s only the ability to fund some specific ships that can be a problem now,” Shivakumar added.
Gautam Khurana, Director (Finance), at Thailand-based Precious Shipping Public Company Limited said, “While it is true that foreign banks finance Indian flag ships, they are much more cautious and the reasons for that are several”.
“The Indian mortgages are principal and interest mortgages as opposed to account form mortgages, whereby if there is a repossession event, you cannot recover all the cost of repossession expenses, which can be several million dollars. So, this adds cost to a financier who is making a very thin margin. They have choices. Within Asia, there is a lot of demand for finance,” he told the ‘India Ship Finance Forum’ organised by Marine Money.
Under an account form mortgage, the lender can recover the full repossession costs.
“Two, when you do mortgage registration in India, you get only a provisional registration for the first few months, so as a financier you are at risk,” Gautam said.
“We are operating out of Thailand and the Thai government doesn’t say you have to fly our flag. I don’t have any constraints to finance my ships under a particular flag. So, if my Thai banks say you have to register your ships under the Thai mortgage, I do that to make them more comfortable. Similarly, if I have a foreign financier who will say I have to register my ships under a foreign flag, I will do that to make them more comfortable. I think that’s got to be the attitude. It has to be more welcoming towards the financiers rather than telling financiers that he should finance the ship under a certain registry even though he is not necessarily comfortable with that particular registry. Let owners and financers decide which flag the vessel should fly, as is the case with other countries,” Gautam added.
A senior official with a large European bank that funds ship purchases disagreed with the view that lenders are “not comfortable” financing Indian flag ships.
“That is not true. We don’t have flag issues,” the official said, asking not to be named and explained what the real issue was.
“If I chose to fund a Singapore flag ship and this has been tested many times, that from the day of default to money in my hands is 90 days because you can arrest, you can enforce, you can sell it (the ship) off and you are done,” the official stated.
“But, if it is India, it is at least a year, which sounds okay but then my difference is three months against one year and a vessel when not maintained degrades very quickly. You should have the ship back in operation in 30 days, otherwise it’s a big issue because the degradation is very quick. Generally, when you look at flags of convenience, say Liberia, Marshall Islands, Panama, etc they have that provided; the enforcement is quick, easy, painless, sell it off but in India, it’s not like that,” the official added.
Lenders say that India needs to reform the legal and judicial system to tackle this issue.
“India does have admiralty courts, but the cases are not heard and disposed of on a fast-track basis,” the bank official mentioned earlier said.
“Asset enforcement is not a joke. Then, the expenses and the pain that the bank goes through in terms of internal reporting, making provisions and all of that, it’s a situation nobody wants to get into. Also, what happens is a lot of borrowers’ kind of have the feeling that ‘hey, you have the asset; no, we don’t want the asset’ because the asset is a worst-case scenario, the best-case scenario is your cash flow. So, we are hoping that your cash flow is good in the quickest possible time,” the official stated, adding that his bank has exposure to Indian shipping, including small fleet owners.
“I heard people saying the flag is an issue. Probably, some banks have an issue but foreign banks who operate in India, they don’t have an issue,” the official said.
The official, however, cautioned saying that banks have become “very careful” lending to fleet owners after many European shipping banks shut shop in the wake of the 2008 global financial crisis.
Banks, though, acknowledge that they are reluctant to fund purchase of ships that are 15 years old, a trend that is catching up amongst some of local fleet owners.
“In international banking practices, we consider 18 years as a good productive asset life. After that it depends on a lot of factors, how long can you flog it; we can give a loan but the loan needs to fully pay itself by the time the vessel becomes 18 years. If you are taking a new build or a five-year-old vessel, it’s fine. We can give a loan of as much as 10 years. The issue that happens in India is they are looking at buying 15-year-old vessels,” said a second executive with a large global bank that funds the transportation sector including shipping.
“If they come to me with a proposal for a 15-year-old vessel, I cannot do much about it. Because, 2-3 years is not sufficient, and I am not saying it’s too old because from their perspective the logic is that they can still flog the asset as the norms (in India) are not as intense as the European Union (EU) norms are. They can run it no matter how much emissions there are, unless you are calling at an EU port. So, they can buy a really cheap 15-year-old asset and can run it for even 10 years,” the executive observed.
“If a well-maintained vessel is available even at 18 years, and someone thinks he can run it for five years because the freight rates are so high that he can make money in five years, then he will buy it. That is the equity risk he can take and not a debt risk I can take because I have no upside remember. I have zero upside, I only have the interest and can I take that risk, no, I can’t take that risk. He, of course, can take that risk because the whole upside is his. People forget this and they feel that if I can invest why can’t you just give 50 percent of the ship cost because I have no upside,” the executive explained. “Then, the worry is all of these new emissions rules etc that have come in and one needs to be aware what these norms are and which one will take you down. There is a Carbon Intensity Index (CII) which will get published for each ship from 1 April this year. What if the ship is in the E Category (the lowest category), within a year you need to have an approved plan in place to retrofit the ship and improve its CII rating, otherwise the class certificate might not get renewed. Then, its declassed, posing a risk to recovering the money,” the executive added.
