IBA drafts new inter-creditor agreement for resolution of stressed assets

Indian Banks’ Association (IBA) has drawn up an inter-creditor agreement (ICA) to establish the ground rules for the resolution of stressed assets, following the Reserve Bank of India’s (RBI)’s June 7 circular. All lenders will have to compulsorily sign the inter-creditor agreement, according to the fresh RBI guidelines, subject to a board resolution.
 
The RBI in its circular had stated that in cases where a resolution plan is to be implemented, all lenders in a consortium must enter an ICA within 30 days of the review period.
 
In a departure from the July 2018 ICA, where a majority of lenders could terminate the agreement, the new agreement has made no such provision unless the RBI or any other regulatory body comes up with any guidelines for termination.
 
The ICA, circulated among lenders for their consideration, has incorporated the key provisions mentioned by the RBI in its prudential framework for resolution of stressed assets while making changes to the previous non-binding agreement signed by about 35 lenders in July 2018.

The proposed ICA has added a provision under the resolution plan “to regularise the borrower’s account by payment of all overdue amounts to all lenders by the borrower.” This, a senior IBA executive said, could effectively mean a one-time settlement or actual repayment of overdues within a short time.
 
 

“The ICA could be adopted by the lenders for each of the cases, which are required to be resolved through implementation of a resolution plan under the Prudential Framework (of the RBI), with changes or modifications, if any, by way of addendum for any particular case,” a letter by IBA Chief Executive V G Kannan to all lenders, reviewed by Business Standard, said.
 
The agreement has set out procedures for voting by lenders for the resolution plan. Any lender who abstains from voting would be “deemed to have voted against” the plan. The dissenting lenders, however, can become part of the resolution plan if they change their mind during the implementation period of the plan. “The agreement will also provide for payment of not less than liquidation value due to the dissenting lenders” as prescribed by RBI.
 
The earlier provisions allowed the lead lender to arrange for buy-out of the facilities of the dissenting lenders at a value that is “equal to 85% of the lower of liquidation value or resolution value”.
 
According to the new RBI norms, banks will have a “grace period” of 30 days to think of a plan after a “default” and a further 180 days to execute the plan. The banks can delay implementing the resolution plan, but they will need to incur steep provisioning in such cases.
 
Majority lenders definition has also been revised to meet the RBI guidelines – 75 per cent of lenders by total outstanding dues and 60 per cent by the number of lenders.