The ICA signed by two dozen banks and expected to be signed lenders mainly insurance companies and financial institutions should help speed up the resolution of stressed assets, whether these are Special Mention Accounts or non-performing assets.
The inter-creditor agreement (ICA) signed by two dozen banks and expected to be signed by other lenders—mainly insurance companies and financial institutions—should help speed up the resolution of stressed assets, whether these are Special Mention Accounts or non-performing assets. To be sure, the new framework can’t guarantee that assets which are put on sale will fetch better prices, resulting in smaller haircuts. Neither is it likely that a business, that is doing badly, can be set right overnight. However, whatever solutions are arrived at can be implemented faster than they were being executed before this. While banks were earlier using the Joint Lenders Forum (JLF) to try and work out a solution, decisions were often delayed because one lender or another was unwilling to go along with the rest. Despite RBI having tightened the rules and asking banks to make up their minds quickly, the process was not as effective as it should have been.
While the ICA, too, would require 66% of lenders to approve a plan, the lead lender now has a little more flexibility; it has the option of buying out, or arranging for the buyout, the exposure of any dissenting lenders. This would be done at a value that is equal to 85% of the lower of either the liquidation value or resolution value, subject to certain terms and conditions.
While some lenders have been selling their exposures to Asset Reconstruction Companies (ARC)—even those businesses that are currently facing insolvency proceedings in the tribunals—these have, on occasions, posed problems for existing banks since the buyer is not a part of the consortium. The ICA should take care of such problems because it says dissenting lenders have the option to sell or transfer their exposure to any bank or non-banking financial company (NBFC), provided the buyer agrees to be part of the agreement and the resolution plan. This, then, would ensure that an ongoing resolution plan is not de-railed. Hopefully, lenders will not drag their feet on key decisions and not misuse the required consent level of 66% to compel the lead lender to buy out the exposure. Also, the overseeing committee will add another layer to the process, but, given how banks are apprehensive of taking decisions on sales of assets at haircuts, it is perhaps necessary at this stage. If this ICA works and banks are able to come up with solutions for stressed assets, they might not need to transfer the assets to an AMC, as has been proposed under Project Sashakt. It makes little sense for banks to contribute to the equity of the AMC and transfer weak assets at a haircut.