A customer walks out of a State Bank of India Ltd. (SBI) branch in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)

Lenders Sign Inter-Creditor Agreements To Speed Up Bad Loan Resolution

Led by State Bank of India, the country’s lenders have come together to sign an inter-creditor agreement that aims to speed up the process of stressed asset resolution.

In a stock exchange filing, SBI said that its board has approved the signing of the inter-creditor pact. Sixteen public sector banks and three private banks have already signed the agreement, V.G. Kannan, CEO of the Indian Banks’ Association told reporters in Mumbai.

The inter-creditor agreements are part of the ‘Sashakt’ resolution framework released by banks in July. The new framework puts the onus on the lead lender, who is then responsible for implementing a resolution plan in a time-bound manner. The framework also envisages the setting up of an asset management company, which raises an alternative investment fund to invest in stressed assets. The framework comes against the back-drop of more than Rs 10 lakh crore in bad loans on the books of Indian banks. That number is set to rise further this year.

With the signing of the inter-creditor agreements, the first of the steps envisaged in the Sashakt plan is in place.

As per the agreement, lenders with an exposure to an account, will appoint a lead lender. This lender will then act on behalf of the consortium. It’s responsibilities will range from determining the proportion of sustainable debt in a company, to finalising the terms of a resolution plan.

According to the agreement:

  • The lead lender will submit a proposed resolution plan to an overseeing committee.
  • Terms of the resolution plan will need to be approved by 66 percent of lenders.
  • The resolution plan approved by majority lenders shall be final and binding.
  • Relevant lenders shall take all necessary actions for implementation of the approved resolution plan within the agreed timelines.

The lead lender can offer to buy out the share of loans held by those not in favor of the resolution plan.

The lead lender shall have the right (but not the obligation) to arrange for buy-out of the facilities of the dissenting lenders at a value that is equal to 85 percent of the lower of liquidation value or resolution value.
Inter-Creditor Agreement

The dissenting lender can also sell its exposure to an outside party like a non-banking financial company. It also has the option to arrange for a buy-out of loans from other lenders at 125 percent of the liquidation or resolution value, whichever is higher.

The lack of consensus has been one of the major issues facing resolution, said Sunil Mehta, chairman of Punjab National Bank. “The inter-creditor agreement allows us to deal with that issues. From here-on, the responsibility for resolution will be with the lead lender.”

Banks have finally understood the importance of working together, interim finance minister Piyush Goyal told reporters in New Delhi.

Almost the entire banking system and prominent NBFCs like REC, PFC are all joining the inter-creditor arrangement, which has held back fast and effective resolution of stressed assets for decades in the past. There were often occasions that a good resolution plan which would have helped saved thousands of jobs was held up by one or two creditors for months and years, thereby eroding value for the banking system.
Piyush Goyal, Interim Finance Minister

Resolution Plan & Standstill Agreement

The nature of the resolution plans approved under the inter-creditor agreements would be similar to those under consideration as part of the Insolvency process. However, in this case promoters would continue to be in-charge.

The resolution plan may include a sale or a transfer of all or part of the assets of a borrower, said the agreement. It could also include release of any security held by bankers as collateral against a loan. An extension of the maturity date of a loan or a change in interest rates may also be considered, said the agreement.

During the period that a resolution plan is worked upon by the lead-lender, certain ‘stand-still’ agreements will be in place. Lenders will not be allowed to commence any civil action against a borrower. Lenders will, however, be allowed to pursue criminal action of needed.

Protection For Lead Lender

According to the agreement, the lead lender will be entitled to a mutually agreed upon fee for its services. The fee will be paid in proportion to the loan amount held by individual lenders in an account.

However, the agreement protects the lead lender from any additional liability.

The lead lender, its employees, directors, representatives and agents shall not be liable and shall not be held responsible (except in the case of wilful default, gross negligence or fraud) for any loss, liabilities or damages whatsoever, to any relevant lender.
Inter-Creditor Agreement

The agreement goes on to say that each individual lender “shall indemnify” the lead lender against any cost, loss or liability incurred.

In more than half the stressed accounts, the lead lender will be SBI, BloombergQuint reported earlier.

Terminating Inter-Creditor Agreement

The text of the agreement allows for its termination under a few scenarios. Key among them is a scenario where the Reserve Bank of India raises an objection.

“This Agreement shall be terminated in case there is any guidance or prescription from the RBI or any other regulatory or governmental authority to terminate this Agreement,” it says.

The RBI had released a new stressed asset framework in February. As per that framework, banks had been given 180 days from the date of default to come up with a resolution plan. That plan, however, needed to be approved by 90 percent of the lenders in a consortium.

PNB’s Mehta said that the inter-creditor agreement is in compliance with the letter and the spirit of RBI’s new stressed asset framework.

Apart from any emerging regulatory restrictions, the agreement can also be terminated if approved by 75 percent of the lenders party to it. However, a resolution plan approved under the inter-creditor agreement would continue to be in place even if the agreement itself is revoked.