1 June 2020: Consortium lenders are planning to accord greater rights to the lead lender by amending their inter-creditor agreements (ICA), two people aware of the matter said, aimed to speed up decision-making in debt resolution as they brace for a surge in bad loans.
Under ICA, lenders jointly appoint a lead bank which functions on behalf of the entire group, and crafts a resolution plan to be approved by two-thirds of the members. According to the persons cited above, who spoke on condition of anonymity, the Indian Banks’ Association (IBA) is discussing the changes, which will take effect once approved by its members.
“Instead of the earlier norm of getting majority lenders to approve all decisions, some will be left to the lead lender. We are trying to make the minimum voting requirement dynamic, depending on the requirement,” said the first of the two bankers quoted above.
For instance, when new lenders want to join an existing ICA, existing ones have to approve it, a lengthy process. The new ICA will allow the lead lender to unilaterally approve it. This essentially means that State Bank of India (SBI), the lead lender in most lending consortia, will be able to sidestep other dissenting lenders in some matters, quickening decision-making.
“If major lenders take a decision, then the smaller lenders should not be holding it back. There are cases where just because one lender has not given a no objection certificate (NOC), the entire process has stalled and that is what we want to change in the new ICA,” said the second banker cited above.
The second banker said that in large consortia with more than 20 lenders, it becomes difficult to get everyone on board. “We are fixing the voting as per the nature of the requirement. Suppose it is a simple NOC, the lead lender can be empowered to approve it without putting it to vote. Then, there will be certain requirements where we would need approval of 60% lenders by number and 75% by value,” the second banker said.
However, in cases where there is a resolution to change the existing management of a company, it would require approval of all lenders as it affects everyone.
“A lot of sectors may require restructuring and additional loans, but if the time taken in these decisions is too long, then it will simply kill the asset. Otherwise, it takes a lot of time to get a go-ahead from every lender,” said the second banker quoted above.
Categories: Legal update