Banks and financial institutions on Monday signed an inter-creditor agreement (ICA) aimed at faster resolution of stressed assets of Rs 50 crore or more which are under consortium lending.
According to Indian Banks Association Chief Executive VG Kannan, the ICA has been executed by 24 lenders, primarily those who have obtained their board approvals. SBI, PNB and LIC were among those which signed the agreement on Monday. “Other lenders are expected to execute the ICA shortly after getting approval from the respective boards,” he said.
The ICA will be applicable to all corporate borrowers who have availed loans and financial assistance for an amount of Rs 50 crore or more under consortium lending or multiple banking arrangements. The lead lender — the lender with the highest exposure — will be authorised to formulate the resolution plan, which will be presented to the lenders for their approval. “The decision making will be by way of approval of ‘majority lenders’ — the lenders with 66 per cent share in the aggregate exposure. Once a resolution plan is approved by the majority lenders, it will be binding on all the lenders that are party to the ICA,” IBA said.
Each resolution plan that is formulated in terms of the ICA will be in compliance with the RBI circular and all other applicable laws and guidelines, IBA said. The RBI had earlier concerns about the ICA as it was contrary to its circular on February 12 which said all lenders on the consortium should approve the resolution plan within 180 days of default and even if one lender disagrees, the loan should be referred to the bankruptcy court.
The Sunil Mehta Committee on resolution of stressed assets, a government-appointed panel, had proposed the inter-creditor agreement among other measures after criticism that at times smaller lenders in a lending consortium were creating roadblocks for speedier resolution. The agreement gives a bigger say to the lead lender in a consortium and allows a resolution plan to be approved if 66 per cent of the banks in the group agree to it.
The ICA framework authorises the lead bank to implement a resolution plan in 180 days and the leader would then prepare a resolution plan including empanelling turnaround specialists and other industry experts for operation turnaround of the assets within the RBI’s stipulated time-frame of 180 days.
Banks which oppose the resolution plan have the option to sell their stressed loans to a company at a discount, or buy out loans to that entity from all other lenders at a premium. “The objective is to use this inter-creditor agreement for faster facilitation of the stressed assets resolution,” said Sunil Mehta, non-executive chairman of Punjab National Bank. “One of the major issues was consensus among lending banks on what should have been a common resolution plan.”
If any lender dissents, the lead lender will have the right but not the obligation to arrange for buy-out of the facilities of the dissenting lenders at a value that is equal to 85 per cent of the lower of liquidation value or resolution value. The dissenting lenders can exercise such right of buy-out in respect of the entire facilities held by other relevant lenders.
India’s banks had 12.5 per cent of their total loans categorised as non-performing or restructured at the end of March, according to central bank data. The central bank in February this year withdrew half a dozen loan restructuring schemes and tightened rules to steer more companies to bankruptcy courts. The RBI, vide its circular dated February 12, 2018, issued a revised framework for resolution of stressed assets. The RBI circular requires each bank to have board approved policies for dealing with stressed assets/accounts.
After the recommendations of Sunil Mehta Committee, the Inter-creditor Agreement was prepared under the aegis of Indian Banks’ Association which will serve as a platform for the banks and financial institutions to come together and take joint and concerted actions towards resolution of stressed accounts, IBA said. This agreement will be terminated in case there is any guidance or prescription from the RBI or any other regulatory or governmental authority to terminate it.