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Indian Bankers And Their Race Against Time


Indian bankers are rushing to implement the new ‘Sashakt’ stressed asset resolution. Ever since a committee of bankers recommended the new template at the start of the month, lenders have been working hard to put the building blocks of the plan in place.

The plan includes three crucial aspects. 1) Signing of inter-creditor agreements. 2) Setting up of an asset management company, which then raises an alternative investment fund. 3) Getting asset reconstruction companies and stressed asset funds to bid for these assets and put a restructuring plan in place. BloombergQuint reported on the details of the plan in this report.

But there is another crucial aspect of the plan which bankers failed to highlight in their report. Timing.

For the plan to deliver any tangible benefits at this juncture, it needs to be concluded within the next six weeks. From start to finish.

From the signing of inter-creditor agreements to the bidding for individual stressed assets – it all needs to be done by the end of August.

It is, quite literally, a race against time. Here’s why.

A whole new set of stressed assets will come up against the 180-day deadline for resolution set under the Reserve Bank of India’s new rules released in February. Starting February, the regulator told banks to start resolution for any large account which is overdue by even one day and complete the resolution within 180 days or refer the account for insolvency proceedings. Should the regulatory stance remain unchanged, a large percentage of the accounts that showed a default in February will need to be referred for insolvency proceedings by end of August.

Rating agency ICRA estimates that 70 large accounts with an exposure of Rs 3.8 lakh crore will need resolution by September.

It is against that time-bound backdrop that the probability of success of the Sashakt plan needs to be judged. So, how high is the probability of success?

Also read: Lenders Bank On ‘Sashakt’ Plan To Dull The Bad Loan Pain. But Will It Work?

Inter-Creditor Agreements

First, inter-creditor agreements need to be signed.

The effort is being led by State Bank of India. In a recent interview to Economic Times, SBI chief Rajnish Kumar said that SBI may choose not to lend along with those banks which do not agree to sign the inter-creditor agreements. That leaves small lenders with little or no choice.

But private and foreign banks also need to come on board. According to a person familiar with the matter, the government has called some of these lenders for a meeting to convince them to join the inter-creditor agreements. It is worth recalling that in the past, some private lenders have chosen to stay away from forums like Corporate Debt Restructuring.

Along with a master inter-creditor agreement, individual agreements for each loan account also need to be signed.

If you go by ICRA’s estimate, that’s at least 70 legally binding agreements. All that documentation needs to be in place and approved by the boards of 37 listed lenders in the country and a couple of foreign banks.

Also read: Sashakt Means Empowered... To Make No Decisions

The Institutional Structure

Let’s assume that all lenders do come on board and join the inter-creditor agreements. The next step is to set up an AMC. One which has more than 50 percent ownership and an ‘independent board’. This AMC would then go about raising an alternative investment fund. Again, it must be one where the majority of the funds have not come from the same banks that are selling bad loans.

There is a talk that an existing vehicle may be used to speed up the process. The Sashakt report says that there is “potential to leverage” public-sector ARCs like ARCIL.

The report says: “The ARC would be responsible for placing bid for the stressed asset based on the independent diligence done by the AMC/AIF. Post-acquisition, it would be responsible for financial restructuring and transfer equity holding of the borrower held by it to the AIF. ARC would be compensated for the actual operating expenses and a reasonable return on capital deployed via fees.”

However, it’s not clear whether ARCIL would be allowed to pick up more than 26 percent in stressed assets. An RBI circular dated November 23, 2017, lays down certain conditions for ARCs to pick up more than 26 percent in sick companies. The conditions say:

  • At least half of the board of directors of the ARC should comprise independent directors.
  • The ARC may delegate powers to a committee comprising majority of independent directors for taking decisions on proposals of debt to equity conversion.

According to information available on ARCIL’s website, the ARC has three independent directors, three sponsor directors, one nominee director and the managing director. Vinayak Bahuguna, chief executive officer of ARCIL said that the ARC could change its board composition should it decide to participate in the process. “We would support an initiative if it is beneficial for the system and it makes commercial sense,” Bahuguna told BloombergQuint while adding that all this would need to be done on an arm’s length basis.

Given that no existing structure can be retro-fitted into the Sashakt plan, lenders are unlikely to find a quick-fix. As such, a reasonable amount of time would be needed to get the structure in place.

Also read: Sashakt May Set Right What ARC Structure Couldn’t, Says Bank Of Baroda Chief

Finalising Resolution Plans

Let’s be extremely optimistic and assume that both the inter-creditor agreements and the institutional structure needed for ‘Sashakt’ are in place in the next six weeks. You then come to the resolution plan.

Remember, the RBI’s February 12 circular says that a resolution plan has to ‘implemented’ within 180 days or the account must be referred for insolvency. The RBI goes on to specify what it refers to when it says the plan must be ‘implemented’.

  • A plan will be considered as ‘implemented’ if the borrower entity is no longer in default with any of the lenders.
  • Should the resolution involve restructuring, then all documentation and necessary agreements must be completed.
  • The new capital structure should also be ‘duly reflected’ in the books of the lenders and the borrower.
In a hypothetical case where a company’s debt has to be converted into equity, not only will the lenders have to get all approvals in place, the company too has to get an approval, including from its shareholders.

Anyone who knows the pace at which such processes move in India knows that it would be extremely difficult to implement even a single resolution plan in six weeks, leave alone 70 of them.

The short point – the Sashakt plan may put down a possible blueprint for resolution in the future. But it would take more than garden-variety optimism to believe that it will save banks from taking yet another bad loan hit later this year.

Ira Dugal is Editor - Banking, Finance & Economy at BloombergQuint.