Sops for additional lending by banks
Inter-creditoragreementguidelinesalsoprotectinterests ofthirdpartiesandexclusivesecurityholders
Lenders stepping in place of their peers to provide additional funding in resolution plans will get priority to cash flows, according to the operational guidelines of the inter-creditor agreement (ICA). It will give banks which are ready to offer additional funding over what is pro rata, priority charge on the cash flows and assets of a borrower.
Under the guidelines, the status of third-party and exclusive security holders is to be protected. The role of asset reconstruction companies (ARCs) in the resolution process, once a plan is signed by 66 per cent of the lenders involved in a transaction, has also been written in, but not elaborated.
The operational guidelines were drafted by the Indian Banks’ Association’s (IBA’s) legal advisor, Cyril Amarchand Mangaldas, after an interaction with bankers and key stakeholders held in New Delhi on September 7.
On additional funding, the guidelines note: “Such funding provided by one or more of the lenders or any other person shall be accorded priority status over the cash flows of the borrower for repayment and over the assets of the borrower, or third-party security, as applicable.”
The move seeks to incentivise banks that are ready to go the extra mile in incremental funding under the ICA. “It should also be seen in the context of the fact that a dozen state-run banks are under the central bank’s prompt corrective action and might not have been in a position to take up their pro rata share even after agreeing to a fresh debt infusion plan,” explained a banker. It’s been qualified, though, that “for avoidance of
doubt, the priority status shall be limited only to the extent of such additional funding”.
The buffer is being incorporated at a time when a few senior bankers have informally discussed the possibility of their unsecured exposures also being looked at sympathetically in resolution discussions.
While secured creditors stand ahead of the unsecured in the queue, in several cases, funding was extended for last-mile reasons based on goodwill and credit history, even in the absence of reasonable collateral being offered by a borrower. The priority status given to banks which take more than the pro-rata burden addresses these concerns but is limited to secured creditors as on date.
The move will act as a safeguard for banks which will take on incremental funding, and paves the way – at least on paper – for some of the leading private banks which had sat out of the ICA on worries that the prudent were being penalised; and more money was sought to be given without anything to ring-fence their interests. The crux of the matter was summed up by a banker: “So far what was not being understood was that the impact of an exposure is not uniform across banks. I could have funded a borrower outside of the ICA on my terms. The new status gives us more comfort.”
Most banks have signed the ICA under the government’s Sashakt plan, which was launched to speed up the resolution process of stressed assets in the range of ~ 500 million to ~5 billion under consortium lending. The Reserve Bank of India's February 12 circular had scrapped the earlier arrangement of joint lenders’ forum, which brought lenders together for resolution.
The operational guidelines also take care of third-party and exclusive collateral held by a bank. It’s been an industry practice to get into bilateral deals with a borrower. Under the ICA, such deals must be disclosed and thrown into the common pool to hammer out a resolution.
Worry was that the discounted price might land banks which got into these deals at the end of a bad bargain.
It has been clarified that such lenders shall be entitled to receive the value that is realised or is apportionable towards such asset over which they have exclusive security or thirdparty security, and be entitled to receive an increase in its resolution value equivalent to the liquidation value (as calculated in accordance with the Insolvency and Bankruptcy Code) of the security held by it.
The other significant part of the guidelines is that it explicitly mentions that ARCs will have a role. “In the event the lead-lender formulates a resolution plan involving sale and, or the transfer of facilities to ARC… then such sale, and or transfer shall be carried out in accordance with the applicable guidelines prescribed by the RBI from time to time”. The guidelines, however, do not elaborate if ARCs can transfer loans between themselves.