An Old Problem May Plague India’s New Debt Restructuring Plan

A short window provided by the Reserve Bank of India to restructure debt of companies hit by the Covid-19 crisis could be plagued by a familiar problem — getting bankers together to sign-off on a common restructuring plan.

The banking regulator has given lenders time till Dec. 31, 2020, to invoke a resolution plan under the scheme and asked them to implement it within 90 days. The RBI has, however, insisted that any such plan be approved by 75% of lenders by value and 60% of lenders by number of institutions.

Therein lies the rub, said lenders and analysts BloombergQuint spoke to. Getting bankers to sign an inter-creditor agreement and approve a common restructuring plan in a short period of time has always proved difficult. This time is likely to be no different.

Bad loans in the Indian banking sector could rise to between 12.5%-14.7% due to the Covid-19 crisis, according to the RBI’s financial stability report. The window for restructuring provided by the RBI is intended to prevent bad loans and provisions from spiking suddenly.

New Restructuring; Old Problems

PN Prasad, former deputy managing director of State Bank of India, said signing of inter-creditor agreements and finalising resolution plans often oversteps regulatory timelines.

“The experience of lenders has been that when certain banks delay signing the inter creditor agreement citing legal issues, the process gets delayed beyond the RBI’s timelines,” Prasad said. “Even if the rest of the consortium approaches the regulator, the dissenting lenders did not face any punitive measures for the delays.”

Collective action is difficult to implement in cases where lenders have entered into bilateral arrangements outside the consortium, according to Sunil Srivasatava, former deputy managing director, State Bank of India.

“Historically we have seen that private and foreign banks tend to have bilateral arrangements with borrowers which come in the way of resolving stress,” Srivastava said. “The borrowers end up creating encumbrances on their assets without the knowledge of the consortium members, even though loan agreements bar such arrangements.”

The RBI has tried to resolve some of these delays via disincentives.

In the latest restructuring circular issued on August 6, the RBI said that if a lender does not sign the inter-creditor agreement within 30 days of invocation of the restructuring process, it must set aside a 20% provision against the asset. This is higher than the 10% requirement for other lenders. According to the regulator this is being done “in order to enforce collective action.”

This additional provision is not a big enough deterrent for dissenting lenders to work with the rest of the banks, both Prasad and Srivastava said.

Analysts, too, agree that the suggested framework may not be easy to implement in the short timelines.

“Ultimately, the implementation of the norms as they are intended would be key in getting any desired results,” said Saswata Guha, director of Fitch Ratings India. “Unfortunately, past efforts in getting bankers to work together to get a resolution plan in a time bound manner has not yielded encouraging results.”

Curing The Cause Behind Delays

To be sure, lenders have their own reasons due to which they may not be ready to sign-off on a consortium level inter-creditor agreement and restructuring.

Some common ones include:

Lenders do not want to give up their right to pursue other recovery measures by signing an inter-creditor agreement.
Lenders outside the consortium do not want to share charge of assets pledged to them.
Lenders do not agree with share of recovery allotted to them under a resolution plan.
Lenders disagree with process followed to arrive at a resolution plan

A senior private banker, who spoke on condition of anonymity, said that forcing lenders to agree to a ICA would impinge on its rights to pursue its financial objectives. If a lending institution does not have the freedom to decide for itself, or is forced to sell its debt exposure to a stressed borrower at liquidation cost, private banks would be less inclined to provide credit in the first place, he said.

One solution could emerge in the form of common loan agreements across the banking system so that lenders do not end up adding their own covenants at the time of lending, said Srivastava. “This is where the regulators need to step in and create common loan agreements, which can be used across banks,” he said. “Like in major economies, if there are common agreements, the entire system is in the loop and gaming it will become difficult.”

This, however, would not help in resolving the existing stock of assets coming up for restructuring.

In the near term, one way to deal with the issue could be to incentivise the promoter to resolve the stress at the earliest, since the promoter is a strong common link between most lenders.

“This could be done by getting a prepack IBC mechanism in place,” Nilang Desai, partner, AZB & Partners, said. “The promoters know today the longer they delay resolution, the higher the chances are for them to be disqualified under Section 29A and that will mean if the company goes into IBC later, they’re out.”