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 the other bankers at a premium or sell its loan to them at 15 percent 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 to almost all public sector banks that have signed the agreement. Among private banks, ICICI, Axis, Federal and some smaller banks have signed, however, 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- 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 percent of the principal is repaid and if the loan is serviced regularly. If it takes 4 years for the promoter to pay back 20 percent of the principal, by then banks will have had to provide for that loan in full (first year 15 percent, second year 25 percent, third year 40 percent and fourth year 100 percent). 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 the 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 the 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 like 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 doesn’t 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 behavior. 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.