RBI may allow 66% lenders' approval for resolution of stressed assets

The Reserve Bank of India (RBI) may lower the approval threshold in its revised circular for the resolution of stressed assets to 66 per cent of lenders by value from the current level of 100 per cent.

The central bank is also expected to detail the mechanism for the buyout of exposure from banks which are not in agreement with the majority of lenders on the resolution plan, third-party security and additional funding.

The original February 12, 2018, circular was explicit that resolution plans should be drawn up on unanimous approval by all lenders. While the Indian Banks’ Association (IBA) made a case to the RBI that the consensus floor be reduced to 90 per cent, it is gathered the banking regulator may lower it further.

Senior bankers point out that even before the Supreme Court struck down Mint Road’s controversial circular on grounds that it was ultra vires, it had been next to impossible to get all lenders on board; and opine that even the IBA’s request of 90 per cent is way too ambitious.

The RBI is also expected to spell out some of the finer aspects on third-party and exclusive security; and on the modalities of additional funding. While the Inter-creditor Agreement (ICA) under Project Sashakt in July 2018 did spell out the terms which were not mentioned in the February 12 circular, lenders who were not part of the consortium, but were involved in multiple banking or bilateral arrangements had their own views on third-party security and additional funding (especially the small banks).

Even under the ICA while any provision of the operating guidelines could be amended or modified with the written consent of 66 per cent of lenders, it was categorical that clause 8 (security interest of relevant lenders) and Clause 9 (additional funding) can be done so only with the written consent of 90 per cent or more of the lenders by value party to the ICA. 

On this particular aspect, RBI’s February 12 circular and ICA mirror each other.

Clause 8 was on exclusive security, under which the mortgage of an asset is hypothecated to a particular borrower, but not to all relevant lenders on pari passu basis. Clause 9 pertained to additional funding and the pro-rata amount each lender is required to disburse such that its share in the aggregate outstanding exposure remains the same.

Lenders were divided with regard to both the above clauses – banks with exclusive security did not want it to be put in the common pool; and while they were for a resolution, did not want to take on the risk of additional exposure.

On the latter point, a few banks came on board only after IBA’s legal advisor, Cyril Amarchand Mangaldas, after an interaction with bankers and key stakeholders incorporated in the operating guideline that “such funding provided by one or more of the lenders or any other person shall be accorded priority status over the cash flows of the borrower for repayment and over the assets of the borrower, or third-party security, as applicable.”

An example of the RBI’s February 12 circular creating problems was most evident in the case of Reliance Communications (RCom) when the deal to dispose its towers, fibre and spectrum assets to Reliance Jio was not executed because 100 per cent of the lenders did not agree to it even though there was consensus well above 90 per cent. RCom was left with no choice but to go to the National Company Law Tribunal (NCLT). Another problem was that a huge number of cases had to perforce be referred to the NCLT, and given the bureaucracy and time involved, it resulted in heavy erosion of value to all stakeholders.

India Inc too has been divided on the consensus threshold for lenders with each industry having its on view on the subject. The power sector is of the opinion that it should be 66 per cent by value like in the earlier schemes -- corporate debt restructuring and strategic debt restructuring -- while the shipping industry has pitched for 50.1 per cent.

A pragmatic stance
 

| Move aimed at getting resolution proposals moving

| Getting 100% of banks agree to a resolution plan unrealistic  

| IBA request for 90% threshold also seen as ambitious

| Revised floor at 66% will align it with Project Sashakt

| RBI to detail finer operational aspects in new circular