A banker talks on phone while customers wait inside an Axis Bank Ltd. branch in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)  

Inter-Creditor Agreements To Focus On Mid-Sized Accounts For Resolution

An inter-creditor agreement, signed by a majority of the country’s lenders on Monday, will be used to fast-track resolution for mid-sized stressed loan accounts, bankers involved in the process said.

While large accounts with more than Rs 2,000 crore in debt will most likely need to be resolved under the Insolvency and Bankruptcy Code, loan accounts between Rs 50 crore to Rs 2,000 crore could be cleared faster using the inter-creditor agreement, they said.

The lenders pact is the first step in the Sashakt resolution plan proposed earlier this month. Armed with this agreement, bankers now hope to push ahead with the setting up of an asset management company and then an alternative investment fund, which will eventually take at least a part of the stressed loans off the books of banks.

Stressed accounts with outstanding loans of up to Rs 2,000 crore add up to about Rs 5 lakh crore, said Sunil Mehta, chairman of Punjab National Bank at a briefing on Monday. A banker familiar with the discussions, who spoke on condition of anonymity, said there are nearly such 1,000 accounts, some of which are already tagged as non-performing assets but are awaiting resolution.

It is these accounts that bankers will focus on resolving, using the inter-creditor agreement and the AMC/AIF structure.

With the inter-creditor agreement, the system expects early resolution for the small and mid-sized accounts, said Mehta.

By Monday afternoon, about 20 banks had signed the agreement, which puts the onus of resolution on a lead lender. The Mehta committee, which created the inter-creditor agreement after working with legal heads of over 50 banks, believes that by the end of this week, almost all banks would have signed the agreement. Banks which are yet to sign the agreement have given an in-principle approval, Mehta said.

No Relief For Large Accounts?

While the inter-creditor agreements could help in resolution of mid-size accounts, bankers acknowledge that most large accounts will need to be resolved using the Insolvency and Bankruptcy Code.

This is because the Reserve Bank of India’s new stressed asset framework lays down strict timelines for large bad loan accounts. As per the new framework, accounts with an outstanding loan of over Rs 2,000 crore need to be resolved within 180 days from the first default. If a resolution plan is not finalised within this time frame, the accounts must be referred for insolvency proceedings.

The new framework, which was introduced in February, will mean that close to Rs 3.8 lakh crore in loans would need to be referred to the IBC by September, estimates rating agency ICRA.

For accounts over Rs 2,000 crore a decision needs to be made immediately, or they will face insolvency proceedings. Either way, their path to resolution has been prescribed by the RBI. For the remaining accounts, it appears that the lenders have created a framework which will use consensus for quicker resolution. It still needs to be seen whether smaller lenders will adhere to the limits set in the inter creditor agreement and not go out of it. 
Karthik Srinivasan, Senior Vice President, ICRA

According to Mehta, for the larger accounts, the banking system would use a mix of approaches. This could include referral to IBC and sale of bad loans using the proposed asset management company structure, Mehta said.

The Next Steps

The inter-creditor agreement is the first step in the Sashakt resolution process. From here on, bankers will be working to set up an asset management company, with participation from banks.

Bankers are in the process of drawing up the contours of the AMC structure, said Mehta.

We are looking at a cap on the amount that the banks can invest in the AMC structure, so that questions are not raised on whether bank money is used to repay stressed loans.
Sunil Mehta, Chairman, PNB 

As part of the Sashakt plan, bankers had proposed that the AMC be set up with a board of industry veterans to give the process more credibility. The AMC would act as the central body, which would take a decision on whether the haircut proposed by the lead lender is acceptable or not. It would then facilitate an auction of individual stressed assets.

An alternative investment fund is also in the process of being set up. The committee has already received interest from foreign funds, said Mehta while adding that the details of the AMC and AIF are still being worked out.