30 March 2019: Corporates opposing the RBI’s February 12 circular on loans resolutions have submitted to the Supreme Court that the Inter-Creditor Agreement (ICA) among banks as a possible debt resolution framework has failed to take off as the relevant institutions like LIC, HUDCO, IFCI, IIFCL, NIACL, SIDBI, GIC are not signatory to it.
The companies have slammed the slow progress of the inter-creditor arrangement among the banks saying it is a non-starter due to the absence of relevant members even though the Reserve Bank of India (RBI) has endorsed its utility.
The ICA is seen as helping the debt defaulters to avoid bankruptcy proceedings and a possible debt resolution mechanism.
The ICA is a non-starter because 49 out of 85 lenders (that is 58 per cent) have so far not signed the agreement even after the expiry of eight months, and 10 of the non signatories are government-owned financial institutions and major lenders in the Infrastructure sector — LIC, HUDCO, IFCI, IIFCL, NIACL, SIDBI, GIC, the pleaders’ their submission stated.
“None of the Non Banking Financial Companies/Asset Reconstruction Companies (NBFCs/ARCs) are party to the ICA, without whom the agreement mechanism will not be effective,” the companies further added.
The petitioners said: “In its written submission, the RBI has endorsed the ICA as a possible debt resolution mechanism in its submissions to the Supreme Court, since it is aimed at helping debt defaulters to avoid bankruptcy proceedings and requires only 66 per cent approval of lenders.”
Indian banks, who are trying to sell their troubled assets are part of the ICA.
A group of banks, including public sector, private sector and foreign banks, signed an inter-creditor agreement in 2018 to push for the speedy resolution of non-performing loans on their balance sheets as per which a majority representing two-thirds of the loans within a consortium of lenders should now be sufficient to override any objection to the resolution process coming from dissenting lenders.
Under ICA, minority lenders who suspect they are being short-changed by other lenders can now either sell their assets at a discount to a willing buyer or buy out loans from other lenders at a premium.
The inter-creditor agreement is aimed at the resolution of loan accounts with a size of Rs 50 crore, anything above that are under the control of a group of lenders.
It is part of the broader “Sashakt” plan approved by the government to address the problem of resolving bad loans.
ICA Chairman Sunil Mehta is of the opinion that disagreement between joint lenders is the biggest problem in resolving stressed assets. Many debters and lenders believe that the holdout problem, where the objections of a few lenders prevent a settlement between the majority lenders, will be solved through the inter-creditor agreement.
Such an agreement may persuade banks to embark more quickly on a resolution plan for stressed assets. This is an improvement on the earlier model, which relied solely on the joint lenders’ forum to arrive at a consensus among creditors.
However, the companies approaching Supreme Court against the February 12 Circular on loan resolutions said this alternate mechanism is not taking off.
Indian banks have been forced by the RBI to recognise troubled assets on their books, but their resolution has remained a challenge.
Supreme Court has heard a bunch of petitions across the sectors — Power, Ship-building, Sugar, Telecom — opposing the RBI’s February circular.
A two-judge bench of Justice Rohinton Fali Nariman and Justice Vineet Saran is hearing a bunch of petitions moved by power, sugar, and ship- building companies challenging the RBI’s circular.
On February 12, 2018, the RBI had asked banks and other lenders to either execute a resolution plan for big stressed accounts or file insolvency petitions against them in the National Company Law Tribunal (NCLT).