Revised inter-creditor pacts may do away with need for 66% lenders' nod

The revised inter-creditor agreement (ICA) framework may do away with the approval threshold of 66 per cent of lenders by value to craft resolution proposals. ICAs are also expected to cover standard assets and could be made part of loan covenants from the start of a credit relationship.

Banks will be able to customise ICAs in accordance with their needs even as more financial stakeholders are on-boarded, including those with foreign currency exposures, according to senior bankers involved in discussions.

Separately, the trigger points under the Reserve Bank of India’s (RBI’s) June 7, 2018 circular on its applicability to cases may be up for review. The applicability of the circular had so far been only for stressed accounts in excess of Rs 2,000 crore (effective June 7, 2019), and for those ranged between Rs 1,500 crore and Rs 2,000 crore (effective January 1, 2020). No date had been set for accounts lesser than Rs 1,500 crore.

The reason for the rethink on the threshold in ICAs is to make them less rigid, and even those who sign up can have a clause inserted that if things don’t go according to the plot, they are free to pursue their paths for the resolution of stressed accounts, especially in cases where non-bank players are to sit at the ICA table.    

On the specific issue of making ICAs applicable to standard assets, it was pointed out “some companies will need additional finance during the pandemic phase without which they may land in trouble”, said a senior banker. This is of particular import even after the pandemic and its knock-down effects are fully over as a few lenders may not want to be part of additional funding arrangements for a borrower.
 
Another senior banker added: “ICAs for standard assets have been mooted by state-run banks”, and explained that “there are survival risks even if additional support comes in. The picture would not be clear till assessments of cash-flows can be made properly”.
 

The reworking of ICAs is part of a major effort to get resolutions moving following the suspension of fresh cases under the Insolvency and Bankruptcy Code (IBC) for a year and fears that cases referred to the National Company Law Tribunal (NCLT) may burgeon after the breather. The penalties and provisioning under the June 7 circular are significant as well -- additional provisioning for banks at 20 per cent after 180 days from the end of review period; and 15 per cent after a year; or a total additional provisioning of 35 per cent.
 
The central bank’s June 7 circular restricted participants in the ICA mechanism to entities regulated by it. But going ahead, ICAs may have the freedom to include non-banking financial companies, mutual funds, private equity firms, alternate investments funds, off-shore lenders and platforms with interest in the distressed assets market.
 
“Widening the ICA may lead to situations wherein non-RBI regulated entities refer matters to the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority of India, or the Pension Fund Regulatory and Development Authority. But there will be visibility from inception of the ICA as to where we may be headed,” said a senior banker.
 
The central bank had earlier indicated that it might impose heavy penalties on banks, and stipulate higher provisioning for stressed loans following a supervisory review of its June 7 circular. And that the senior management of banks, could be held personally liable for lack of progress under it. It is, therefore, all the more critical for banks to get the ICA mechanism moving, especially for the period when the IBC comes back into life again a year down the line.

 

 

On the anvil

• Revised inter-creditor agreements to have option of customisation according to specific situations
• ICAs for standard assets crucial even in post-pandemic phase as a few lenders may not want to be part of additional funding arrangements for a borrower
• Reworking of ICAs part of effort to get resolutions moving following the suspension of fresh cases under IBC
• ICAs to include NBFCs, MFs, PE firms, AIFs, offshore lenders, and platforms with interest in distressed assets market