Banks go after promoter trusts of firms having stressed loans

Lenders have started seeking additional guarantees from family trusts of promoters of companies whose existing loans are under stress.

In the last few weeks, top banks have been making inquiries in certain cases where businesses have been hit hard by Covid and they even sought additional guarantees to de-risk their loans, say insiders.

Even in sales, where promoters are seeking additional loans, the lenders are asking for more collateral or guarantees.


“In some cases where promoters hold shares of companies via a trust, banks have been demanding guarantees for additional loans or in some cases for existing loans that are getting stressed,” said Sandeep Nerlekar, managing director of Terentia Consultants.

This comes at a time when several promoters have started creating asset protection trusts where they are parking some of their assets which cannot be touched by any bank or investigating agency in case of a default.

Banks have been seeking the information as to whether the promoter and their family hold any trusts. “It is advisable to create separate structures for family trusts and asset protection. Some promoters who have only put a certain part of their assets aside in asset protection trusts are still safe, and can continue to insulate these in any eventuality,” said Nerlekar.

In the past year or so, many promoters have created asset protection trusts, where all the wealth is held by the trust. Any lender looking to recover dues by targeting the promoters’ personal wealth would find it difficult as it would involve a long and tortuous legal route with an uncertain outcome. Legal experts vouch that assets insulated in such trusts cannot be touched by lenders or any investigating agency.

Speaking to ET, a banker said that additional guarantees are sought in cases where even the entire shareholding of the company is being put within a family trust. In some cases, some promoters had already pledged these shares, and the fear is that if lenders wanted to take over such companies, the trust structures could be a hindrance.

Trusts are structured in a way where the promoter would not be a trustee and hold only about 5-10% stake in the family trust. Industry experts said the Covid pandemic has caused a lot of disruption and some of the mid-scale and small companies may never be able to recover from it.

Some promoters had hoped for a revival in January but the second wave would mean that some of the leveraged businesses would have to be wound up.