Skip to main content

INTER-CREDITOR AGREEMENT: SOME PRIVATE SECTOR AND FOREIGN BANKS SEE RED

The inter-creditor agreement (ICA) between banks, which is part of the government’s Sashakt plan, is meeting with some stiff resistance from some private sector banks and almost all foreign banks. The agreement was mooted by the Sunil Mehta committee as the first step to resolve bad or non-performing loans (NPAs). Any bank that signs the ICA, agrees to the following conditions:
1. When a borrower defaults or shows signs of default, the lead bank shall alone negotiate with the promoter or with rival bidders for a resolution.
2. If any bank dissents, it has the option to buy the loan from other bankers at a premium or sell its loan to them at a 15% discount to the liquidation value of the loan.
3. If two-thirds of the lenders involved in a loan have signed the ICA, then the provisions of this agreement will apply.
Almost all public sector banks have signed the agreement. Among private banks ICICI, Axis, Federal and some smaller banks have signed, but banks like HDFC, Kotak and RBL are holding back, saying they are seeking legal opinion. Foreign banks have refused to sign the agreement from the start on grounds that their global boards won’t let them relinquish their rights over borrowers.
The argument of the private lenders is that even where a loan is in default, they have structured their loans carefully with first charge over some collateral or receivable from some sources. They believe that allowing an SBI or ICICI to negotiate on their behalf will mean they will suffer the same hair cut as other banks who have been less savvy while negotiating the loan. What is worse, signing the loan prevents them from selling their loan to asset reconstruction companies (ARCs). They can only sell to other banks and that too at such heavy discounts that they can’t even think of selling out. What appears to have worried them is the “phone calls” from powerful people asking them why they haven’t signed up.
Legal eagles also say the agreement may give the lead bank far too many rights and too few advantages to dissenters and to those who may have better negotiated their terms. Some also worry that banks may use the ICA to keep accounts from getting into the NCLT (National Company Law Tribunals) under the insolvency code, which in turn may work well for the current promoters. These lawyers and bankers worry that this may in some way sidestep the clean up being attempted by the RBI through the insolvency code and the February circular.
However, public sector banks don’t buy these fears. In the first place, under the February circular, any rated loan under a restructuring package needs to get investment grade rating. Also the loan will be marked NPA immediately on restructuring and can be upgraded only if 20% of the principal is repaid and if the loan is serviced regularly.
If it takes four years for the promoter to pay back 20% of the principal, by then banks will have had to provide for that loan in full (first year 15%, second year 25% third year 40% and fourth year 100%). In contrast, if the loan is sold off to a new company, the loan becomes standard immediately. So the bias will always be to find a new promoter, say public sector bankers. They argue that to say the ICA sidesteps the February circular or helps leniency towards promoters is a completely incorrect charge.
The other grouse for private banks who are holding out is that they can’t take any legal route against the ICA. It is not a government or RBI rule or notification. It is a “voluntary” agreement by banks. Hence, it can’t be taken to court at this stage. Once they sign, they fear it may be too late to go to court. Public sector bankers are less worried about the three private banks who are not signing. They say Kotak and RBL have hardly any share in loans to the big defaulters and HDFC lends mostly only to double-A companies and above.
Their worry is more about foreign banks who have frequently stymied any resolution and threatened to take borrowers to the NCLT, where cases may get stuck either because of the long queue or for want of buyers. There is another worry that non-banking entities such as ARCs point out. The entire NPA restructuring process was supposed to elicit interest from a lot of foreign special situation funds, which have experience in restructuring loans. The current ICA does not allow banks who have signed the agreement to sell to non-creditors.
Hence, aggregation of loans by these foreign funds or even by Indian ARCs becomes impossible. The fear, therefore, is new money, new talent and new ideas won’t enter the system. But it may be too early to speculate about such behaviour. Until now, no loan restructuring has come to the stage of requiring approval. It is only when the first set of loans are restructured by the lead banks that the system will know where and whether the agreement falls short.
The Mint, 21st August 2018

Comments

Popular posts from this blog

Govt’s gamble on GST cuts: What do the bond and currency markets signal?

  It’s not just humans who suffer from cognitive biases; markets do too. Interestingly, different financial markets exhibit distinct biases, each interpreting events through its own prism of prejudice. Take the recent announcements on GST reforms: equity markets have chosen to view them through the lens of growth, while bond and currency markets are focusing on potential macroeconomic risks—fiscal pressures and current account challenges. So, which lens captures the true pulse?Equity markets may be right in expecting GST reforms to revive consumption, which has remained lacklustre for a while. But the key question remains—will this revival come at the cost of broader macro stability?It is well known that consumption stocks have rallied since the GST rationalisation announcement. But what about bond markets? What signals are they sending since this rejig was announced from the ramparts of the Red Fort?The signs aren't encouraging. Bond prices have slumped and yields have surged sinc...

Luxury carmakers urge clarity on GST rates to boost festive season sales

  A clear picture regarding new GST rates at the earliest will help the overall auto industry, including the luxury car segment, to regain momentum in the ongoing quarter, which generally sees enhanced sales on account of the festive season.The high-powered GST Council, chaired by Finance Minister Nirmala Sitharaman, will meet on September 3-4 to discuss moving to a two-slab taxation.In an interaction with PTI, BMW Group India President and CEO Hardeep Singh Brar said the recent speculation about the change in GST rates has caused uncertainty in the minds of consumers.Consumer interest and demand is strong, but they (prospective buyers) have adopted a wait-and-watch approach, and this delayed decision-making is impacting new vehicle sales at a certain level, he noted."Expediting clarity on GST rates is essential to get back to speed and ensure the auto sector's contribution to economic growth during this quarter is robust," Brar stated.He also hoped that the sustainable p...

Sebi proposes tighter norms for green bond third-party reviewers

  Sebi on Friday said it has proposed to tighten the norms to appoint independent third-party reviewers or certifiers for green debt securities to align them with requirements for other ESG-linked bonds.In a draft circular, Sebi said that the current norms for green bonds, introduced in February 2023, lack detailed requirements around reviewer independence, conflict of interest mitigation, and disclosure standards that are now in place for other ESG-linked securities under a June 2025 circular.The regulator's latest proposal seeks public comments on a revised framework that would bring parity by incorporating comprehensive criteria for third-party certifiers of green bonds on non-convertible securities.Under the proposed norms, issuers of green debt securities will need to appoint reviewers who are independent of their management, directors, and key managerial personnel. These reviewers will be remunerated in a way that prevents any conflicts of interest and possess relevant expert...