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Inter-creditor agreement is one of the strongest forms of action from banks, says Rashesh Shah of FICCI

The inter-creditor agreement (ICA) framework which will be signed in a few days is one of the strongest forms of action taken by all the banks, said  Rashesh Shah, president, FICCI.
The framework will authorise 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 RBI's stipulated time-frame of 180 days.
In a view to fast track NPA (nonperforming asset) resolution, Sunil Mehta committee recommended the ICA framework that envisages effective communication among banks.
The committee headed by the non-executive chairman of Punjab National Bank, Mehta, along with State Bank of India (SBI) chairman and a few other senior bankers presented the plan before the interim finance minister Piyush Goyal last week.
The ICA will also allow the banks to resolve the problems if 66 percent of the lenders agree.
The government also announced Project Sashakt, a five-pronged strategy, based on a recommendation by the Mehta committee.
Latha Venkatesh along with Rashesh Shah, president, FICCI and SS Mundra, former deputy governor, RBI discuss the above issues.
Edited Excerpts:
Q: First let me start with this inter-creditor agreement (ICA). Do you think it can replace  the Joint Lender Forum (JLF)?
Shah: I think so, there are many parts to this, there is an Asset Management Company (AMC), there is an Alternative Investment Fund (AIF) and there is an Asset reconstruction companies (ARCs), but the ICA is actually the most important part.
Getting banks to agree on something with the same sense of urgency is going to be very important. So, the ICA is a very important one. It will also be ratified by the boards of every bank.
So, the boards of every bank are consciously entering into this agreement saying that we will abide by the rules of this. This is something that was there in Corporate Debt Restructuring (CDR) format and joint lenders format but this is a lot more enforceable and expects that the banks will follow through on that.
We still have a few questions on this. Some secured creditors will have specific rights or they have a specific charge on a particular asset. Some creditors may have a corporate guarantee and a personal guarantee which other creditors may not have.
So, how will you equalise the creditors when you decide the resolution plan that everybody is bound to agree because they are bound to agree. That question still remains open. But it is a great first step. Amongst all the agreements among creditors we have had, the ICA is one of the strongest forms of action from all the banks as a collective, as a consortium which will act together with one single voice and with the same speed.
Q: As Rashesh Shah pointed out there will be creditors with different guarantees and collateral. More importantly, there will be unsecured creditors. So, if the lead banks put up a plan and the unsecured creditors don’t get what they want or even the 33 percent of the banks who want to dissent they can drag them to the NCLT, isn’t it? How does the ICA will work?
Mundra: One thing I agree with Rashesh and endorse what he says. When the RBI issued the circular in February scrapping all the schemes as well as JLF, I had mentioned if these things are to be done in a time-bound manner, a different group of lenders with a different kind of exposure to be brought together.
Now JLF was a regulatory nudge, maybe it is more voluntary which they are adapting so in that sense is a good move, no doubt about it.
Yes, there are questions in addition to what Rashesh has already mentioned about the different kind of security level. There is also another issue there may be some institutions who have done the lending. There may be non-banking financial companies (NBFCs) who have done the lending, some of these might be having external commercial borrowing (ECB) also and on top of that many banks have sold their exposure to ARCs, so ARCs also become a part.
In many of these cases, you find that some of the banks that are part of the exposure has already been sold. So apart from the security level of the banks there is a universe of other players also. So in that way, there would be challenges and since there is an Insolvency and Bankruptcy Code (IBC) framework in place, the possibility would always remain that someone can go and challenge in IBC.
Because the provision is there, but despite all being there, this is a good move and one can be optimistic that at least it brings a framework and discipline and if not in all cases it may pave the way in a good number of cases.
We have to see from that perspective because in this kind of situation there can’t be an arrangement which will say that is a full proof arrangement. There cannot be any challenges to that; that possibility would always remain.
Q: Let me come to the AMC,  the Sunil Mehta plan said that it should be largely private sector owned. The banks should only be minority partners. Now if banks can only hold 49 percent which firm from the private sector will participate? Maybe some private banks, but will there be 51 percent? Give me names of three companies or entities who will be willing to participate in an AMC like this?
Shah: As I said it could be an ARC like ours, it could be Alvarez and Marsal kind of entities, it can be other operating entities.
Maybe consulting firms will start an AMC where there can bring in operating expertise in to that. So, AMCs I don’t think there is a lot of problem in that, because it will get created.
I don’t think the banks need to participate in the equity of the AMC because it is an operating turnaround company which won’t require the equity from banks because that won’t help much.
The larger challenge is going to be AIF. It needs capital and current estimates are whether one or multiple AIF, you will need about Rs 30,000-40,000 crore of capital.
The RBI has said that no bank can be more than 10 percent contributor in any AIF and even whatever they contribute there will be 150 percent capital charge on the AIF investment. So, if a bank is putting about Rs 1,000 crore in an AIF the capital charge will be equal to Rs 1,500 crore. That maybe a hurdle for banks to overcome to invest in the AIF.
Q: How long do you think it will take to put together, if banks also have only limited cash? so how long it will take to have an AIF?
Shah: There are a couple of ways this will be done and as I said in AIF the larger challenge is going to be ensuring that there is more than 51 percent ownership by non-government entities.
I think 49 percent in spite of the capital charge and all banks will put because the same capital is coming back to them. So, in a way banks are releasing their capital and on NPA, the capital charge is equal to 150 percent.
So, I think banks will release capital on one side and put it here. So let us say a State Bank of India or Bank of Baroda if they are releasing Rs 3,000 crore by selling those assets to the AIF they might recycle that Rs 3,000 crore back in to the AIF. So, 49 percent of an AIF, the PSU banks may contribute.
The management and the governance of the AIF want to make sure that they are buying the loans from the banks on an arm’s length bases; because you don’t want the AIF’s to be pressuring to buying the loans from the bank as you said the buyer of the last resort.
Ideally, this AIF should be one more player in the market and the banks, after they decide to put it for auction and other ARCs and AIFs can bid. As you said if nobody bids then this AIF could buy it at a price, but that is where the trickiness will come in that how we ensure they buy at an arm’s length price.
Q: Do you really see this as a possibility banks have 49 percent other funds will put in money. Why would a Brookfield’s or anybody put in money and though this AIF is supposed to provide the floor price? Is this looking feasible to you?
Mundra: We have to see it slightly differently. Number one, a very fundamental issue that AMC and AIF are compliance with the regulation and also in sync with the IBC provision.
What actually worries me and little bit confuses is that there is some friction which may come between the February 12 framework of the RBI and the various schemes which are presented here.
Now if you look at it for the exposure above Rs 2,000 crore as per the February circular there was already a roadmap and I think we are nearing that roadmap.
It means those cases are either in the process of being resolved within the RBI framework or they are heading for the IBC because there is little time left. So, obviously, it would not be feasible or practical to believe that within one month all these structures can come in place and those cases can be dealt with through the AMC or AIF route. It means we are not talking about the cases above Rs 2,000 crore.
Now this leaves the cases which are below that threshold. The banks contributing to AIF and relatively asset weightage ratio which they have to put then you are not saving any capital in a sense. But the other issue would be that if we have to bring the external partner for 51 percent whether there would be any equal interest about these assets which are of a relatively smaller size it means there is a pool of dispersed assets and then someone has to deal with that. I think this will be another very relevant issue which one would need to apply mind to.
Q: There is a plan which is, we will in a bit discussing it with the REC chairman as well, the hope that you can put some of these power companies in an SPV and the manage it till the market improves. Given the tone of the February 12 circular do you think Reserve Bank will even allow these assets to be passed at net book value?
Mundra: What we are missing and this is a good question, but if you go back to February 12 circular, it mentions that any asset above Rs 100 crore right from the rephrased date are to be put under resolution plan which can be sold, which can be repaid or which can be restructuring but there is a requirement of rating.
We are mentioning a timeline for above Rs 2,000 crore and for other, there is a period of two years and they may come with a period for that but the clause about getting each asset under the resolution plan rated remains as it is. It is regardless to my mind at least as I read it regardless of the fact that what kind of timeline RBI is going to give.
If that is the case then it means if you are doing a rating and that brings a sustainable portion and most of the cases tantamount to restructuring and where the provisioning norm and asset classification norms would also kick in.
So if that all is coming into play right from the date of that circular and it is an operational framework now then I really don’t understand where you take it elsewhere and deal in a different fashion. That is what I was mentioning that there could be friction this two framework. Frankly, I am not very clear on that how this two things are going to play together.

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