Banks Propose Master Inter-Creditor Agreement Under RBI’s New Stressed Asset Rules

Indian banks have initiated the process of signing a master inter-creditor agreement, which will govern the resolution process for stressed assets under the Reserve Bank of India’s new rules.

These rules, released last week, ask lenders to sign an inter-creditor agreement to ensure that a resolution plan can be finalised without the long delays that have been seen previously. Thirty-six banks had earlier voluntarily signed inter-creditor agreements to speed up the resolution process. Now that the RBI has made it mandatory, a master-agreement has been drafted by the Indian Banks’ Association. BloombergQuint has seen a copy of this agreement.

The agreement provides the “ground rules for finalisation and implementation of the resolution plan”, the draft said adding that the overall framework seeks to revive and rehabilitate the borrowers’ debt exposure with a view to ensure lenders optimise and preserve recovery value.

Appointment Of Lead Lender

The RBI’s new rules ask that an inter-creditor agreement be signed within thirty days. Among the first steps as part of the agreement is the appointment of a lead lender.

According to the agreement:

• The lead lender will oversee the resolution process, appoint advisers, arrive at a level of sustainable debt and arrive at the terms of the proposed resolution or restructuring plan.
• The lead lender will be entitled to a fee as decided upon through a separate agreement with the consortium. This lender will also be compensated for any loss or liability that emerges in the course of the resolution process.
• The lead lender would not assume any fiduciary responsibility. “By assisting and facilitating the formulation and implementation of any Resolution Plan, the Lead Lender shall not be deemed to be construed to have provided any guarantee or assurance to any Lender,” the draft agreement states.

Approval Of Resolution Plan

After the signing of the inter-creditor agreement during the review period and the appointment of the lead lender, the process of finding a resolution plan will begin. The resolution plan may include elements including a transfer of assets, a transfer of shares held by the borrower or conversion of debt to equity, among other things.

In order for the resolution plan to be approved:

• A majority of lenders must approve the resolution plan. As per the RBI’s new stressed asset framework, ‘majority’ is defined as 75 percent of lenders by value of debt and 60 percent by number.
• A resolution plan will be considered approved once the majority of lenders agree to its terms.
• The resolution plan must be implemented under the 180-day provided under the RBI’s new rules. Failing which, the banks will be required to set aside additional provisions.
• If the resolution plan involves restructuring of the borrowers ‘existing debt, teh plan must be referred to an ‘Overseeing Committee’ set up by the IBA. Operating guidelines for functioning of the OC will be issued by the IBA in time, the draft said.

As part of the inter-creditor agreement, banks will also agree to a ‘stand-still’ during the period of resolution.

Dissenting Lenders

A key part of the inter-creditor agreement is to lay down rules to deal with dissenting lenders. An earlier framework, where banks set up joint lender forums to resolve individual assets, was riddled with long delays due to a handful of lenders dissenting.

On this, the inter-creditor agreement says:

• The Resolution Plan shall provide for payment of “not less than liquidation value” to dissenting lenders.
• The liquidation value will be decided by an independent valuer.
• The dissenting lender can also agree to sell or transfer their loan facilities to any lender part of the resolution plan at a mutually agreed-upon price.

At present, the proposed inter-creditor agreement will apply to domestic banks. However, in time, NBFCs, other financial institutions and asset reconstruction companies may accede to the agreement, the draft said. Foreign lenders, with exposure to a borrower in foreign currency, must either seek RBI permission or refinance their exposure in Indian rupees to be part of the process.

A senior lawyer, who spoke on condition of anonymity, said that not all creditors will be willing to sign the inter-creditor agreement in the current form. Asset reconstruction companies, debt funds and foreign banks will be reluctant to get stuck in a long drawn out resolution process without any legal recourse to invoke securities that they may hold against the loans.

However, Subodh Sadana, partner at Khaitan & Khaitan believes that should the inter-creditor agreements become effective, banks may make a greater attempt to finalise resolution plans. “Under the new RBI framework and with the inter creditor agreement taking the lead to finalise a resolution plan, before the case is referred under the IBC, lenders would first be interested to see if the corporate defaulter can be revived and whether it can run successfully,” Sadana said. “There is an incentive to restructure the debt exposure under the new framework and only if lenders feel there is a low possibility of revival will they refer it to IBC.”