Troubled debt: Cracks emerge in India Inc's loan recast plans over ICAs

Private banks may prefer to make extra 20% provisioning and walk out

The first major cracks have emerged over an early restructuring of troubled loans, with banks sharply divided over the mandatory signing of inter-creditor agreements (ICAs).

Private banks have come to an “informal consensus” that they would rather take an additional provisioning hit of 20 per cent than sign “ICAs which are detrimental to their interests”.

They are of the view that state-run banks (with bigger exposures) will call the shots in crafting ICAs. This can lead to a situation in which the void created due to the exit of private banks from the recast process (in specific accounts) may not be recouped by state-run banks, given their capital constraints and exposure limits.

Another fallout is that if lenders representing not less than 75 per cent of the credit facilities (fund-based as well non-fund based) by value and not less than 60 per cent by number do not sign the ICA within 30 days from the invocation, it will be treated as having lapsed. The stage is then set for banks drawing up hugely divergent board-approved policies for loan recast evaluation. Such policies are a must under the Reserve Bank of India’s (RBI’s) August 6 circular. This can seriously trip the entire recast arrangement.

The RBI’s resolution framework for Covid-19-related stress of August 6 calls on banks not signing ICAs to maintain a provisioning of 20 per cent of the debt on their books within 30 days of invocation. It adds this is to hold good, even when the invocation lapses on account of the threshold for signing the ICA is not met — if lenders had earlier agreed on invocation, but did not sign on.

A few leading private banks have raised the matter with the banking regulator — that signing ICAs should be a commercial decision best left to them; and even the additional provisioning of 20 per cent for not signing on is bad in principle. This has the potential to open the door for litigation.

The ICA, and interlinked issues, found mention at the Indian Banks’ Association’s management committee meeting last Friday.

“There is no consensus on ICA to date. We will have to wait for the Supreme Court’s September 28 hearing on the levy of additional interest rate on loans under moratorium,” said a senior banker.

The three-member expert committee’s views on the waiver of interest — the committee comprised Rajiv Mehrishi (former comptroller and auditor general), Ravindra H Dholakia (former monetary policy committee member), and B Sriram (former managing director, State Bank of India) — are seen as having a bearing on how banks look at the recast matrix.

“Only a few large loans — over Rs 1,000 crore — have come up for recast. The bulk of the requests (for recast) are from the small, micro and medium enterprises,” said another senior banker.

He added: “But even then, ICA as an issue remains.”

What has further complicated matters is the fact that the RBI’s June 7, 2019, circular set no date for its applicability to accounts less than Rs 1,500 crore. It had been notified only for stressed accounts in excess of Rs 2,000 crore (effective June 7, 2019); and in the range between Rs 1,500 crore and Rs 2,000 crore (effective January 1, 2020). And now, banks have to do a cold start on the recast of loans of less than Rs 1,500 crore in a jiffy.

There is also confusion whether all five parameters laid down by the K V Kamath Committee are to be complied with when a resolution plan is drawn up. These pertained to the ratio of total outside liability to adjusted tangible net worth, ratio of total debt to earnings before interest, tax, depreciation, and amortization, current ratio, debt service coverage ratio, and the average debt service coverage ratio.