A year since signing, inter-creditor pacts yet to take off, concede bankers

Can the country’s bad loan mountain ever be cut down to manageable levels? It was in August 2018 that the Sunil Mehta Committee rolled out the idea of inter-creditor agreement (ICA): to get banks to sit around the spit, and clean up their non-performing assets (NPAs). State-run banks signed up on the double, but it took a quarter of the financial year before private banks (reluctantly) signed up. And now, nearly five months after the central bank made the ICA mandatory in its June 7 circular, we have not travelled much further down the road.

ICA’s architect, Sunil Mehta, who is also the chairman of Punjab National Bank, feels, “it is too short a period to say that the ICA has failed to yield the intended results. We are going through a transitory phase”, and adds: “These stressed assets, including power plants, have a lot of value, but banks have limitations in holding on to them for long due to their capital constraints”.

It’s one of the worst kept secrets in banking, and not many chief executive officers (CEOs) of banks want to go public on it, but concede in private – the ICA has simply not fired in the way it was imagined. What you now see is passing the buck; taking unilateral decisions; quibbling and hair-splitting over who gets to keep what, and stands where in the pecking order for the assignment of assets; and what is seen as a lack of co-ordination among the regulatory authorities. Also, a whole class of vendors of finance — from private equity (PE), alternate investment funds (AIFs), mutual funds (MFs), insurance companies and off-shore lenders  — are still outside the pale of the ICA.

Running in the same spot

On its part, the Reserve Bank of India (RBI) is said to be looking closely at the ICA as it stands today; it can be expected to convey its views to bankers on how to go ahead – not necessarily by way of a circular though. And just in case you thought that the RBI’s June 7 circular making ICA mandatory would have settled matters, it has only complicated it further. 

Says Divyanshu Pandey, Partner at J Sagar Associates: “The ICA is a broad framework and within that the signatories have to find a way to make it work rather than pull in different directions”. (Please see box: The Grey Areas). Notes the June 7 circular: “Additionally, the ICA may, inter alia, provide for the rights and duties of most lenders, duties and protection of rights of dissenting lenders as well as treatment of lenders with priority in cash flows and differential security interest, etc”. Points out the CEO of a bank, “This has left things open to interpretation”. As in, to what extent “can you customise the ICA”.

The ICA is silent about the means and timing of payment of liquidation costs to dissenting creditors as well. It is also not clear on what the rationale is to permit a “dissenting creditor to become an assenting creditor” during the implementation of a resolution plan. And what happens if such a creditor has received part-payment in priority to the assenting financial creditors? The ICA is mum on the clawback in such a scenario. These doubts are on the finer aspects of the ICA; you also have the more mundane — the here and now of things.

And look no further than HDFC Bank’s move to debit Rs 200 crore from Altico Capital’s account (on which it had a lien) to secure its interests; Altico and Mashreq Bank have since approached the RBI seeking its intervention. While there was no ICA in place when the incident happened, says a banker: “In the current context, it is each bank to itself. Maybe, I would have done the same in a case like Altico. Let the central bank decide on the dispute, or the courts. My job, like all CEOs, is to secure the interests of the bank”. And, he has not been inspired by French philosopher Albert Camus: “To be happy, we must not be too concerned with others.”

Bankers are wary of taking a call on a haircut. This is despite the terms of the ICA making it clear that any decision agreed to by lenders representing 75 per cent by value of total outstanding credit facilities (fund- as well as non-fund based) and 60 per cent of lenders by number shall be binding upon all lenders. “I would rather take a case into NCLT (National Company Law Tribunal) rather than get into trouble later with the enforcement authorities”, says a banker.

You also have the small versus big bank headache in the background. Sumit Kakkar, Chief Credit Officer at Federal Bank says, “Large banks generally take the discussion forward in the consortium and call the shots which is not always necessarily to a small bank’s benefit. Bankers prefer doing bilateral agreements rather than going through the consortium because the resolution process just defers everything”. 

The pain-point here is that the impact of a bad exposure is not uniform across banks; it’s relative to specific balance sheets. “A lay notion of what’s big and small doesn’t work here. If I had to fund a borrower all over again, I could have done it outside the ICA anyway and on my terms”, adds a banker. 

Time is running out

If all this was bad enough, the June 7 circular has another blind spot. It said all stressed accounts of over Rs 2,000 crore will come under its purview with immediate effect; it will be January 1, 2020, for those between Rs 1,500 crore and Rs 2,000 crore, but was silent on those below Rs 1,500 crore. Regulatory co-ordination is another concern. 

Adds Pandey: “The ICA framework, as on date, is restricted to a class of lenders which are largely banks. You need to get alternative financiers like MFs and PEs (if their AIFs and non-banking financial companies or NBFCs are involved) so that a consolidated collective view can be taken for a resolution”. This lack of co-ordination is one of the key reasons for the festering mess at Dewan Housing Finance. Says Mehta: “RBI has made ICA mandatory for lenders (banks). The regulators for insurance (the Insurance Regulatory and Development Authority of India) and capital markets (the Securities and Exchange Board of India) should also prescribe a similar approach, keeping large systemic interest in mind”.

If the ICA does not get moving soon, banks will not hesitate to  move NCLT; it’s a different matter that the NCLT is groaning under the burden of cases referred to it. Then think about this: by January 24, telcos have to cough up Rs 1.33 trillion in accordance with the Supreme Court diktat – payment towards spectrum-usage charges and licence fees – in the way adjusted gross revenue has been calculated by the government. So, how is this linked to the ICA? As Pandey notes: “Off-shore lenders don’t have a seat at the ICA table as of now. This can become an issue if a company wants to source external borrowings, and this risk will get priced into the loan”. And telcos have substantial foreign debt on their books.

Simply put (in every which way), the window to get the ICA in order is getting smaller. It will be a missed call for which banks will have to pay.

The grey areas

 

 

• The standstill provisions of the ICA should be on similar lines as moratorium under the IBC. The current draft permits lenders to take charge of the money lying with them as margin, fixed deposit or cash collateral. Giving an option of recovery to a lender defeats the premise of collective action. This is also not in sync with a fundamental principle of ICAs recognised globally — of monies recovered being held in trusts, and excess amounts being turned over for the benefit of all lenders.

• The ICA is silent about the means and timing of payment of liquidation costs to dissenting creditors. Further, it is not clear what the rationale is to permit a dissenting creditor to become an assenting creditor during implementation of an RP. What happens if such a creditor has received part-payment in priority to assenting financial creditors. The ICA is silent on the clawback in this scenario.

• Default with NBFCs does not trigger the review while it does with other entities covered under the RBI’s June 7 circular. The rationale for this exclusion is not clear. This is leading to diverse interpretations in the market that the 180-day timeline from the review period or reference date is not applicable to NBFCs.

• Voting percentage gets determined as of the reference date. The ICA should factor in the fact that the voting percentage can be dynamic if the lenders trade distressed debt.

• Requirement for mandatory review of an RP which envisages restructuring by an overseeing committee (constituted by Indian Banks Association) where the existing promoter is continuing. The rationale for this is not clear. It adds another layer of bureaucracy and creates uncertainty on the contours of a resolution plan.

• The ICA should not have any element of subjectivity or discretion. If alternative financiers and foreign currency lenders are to sign up, the ICA has to be very specific and detailed.