Resolution of bad assets: RBI set to recast inter-creditor agreement

New framework likely to be introduced even before default happens

The inter-creditor agreement (ICA) is in for a makeover with the Reserve Bank of India (RBI) weighing options to clear the logjam in the resolution of bad assets due to bottlenecks in its working.

Among the aspects that can be looked into by the central bank is the feasibility of weaving the ICA right from the start of a relationship within consortiums and multiple banking arrangements, so that there is visibility on what needs to be done when an account defaults or faces difficulty. 

“This is to ensure that relative access to security and its seniority is laid out a priori,” said a senior regulatory official.

The threshold of a relationship beyond which the ICA is to be woven at the pre-default stage is a matter that could be left to the discretion of banks. 

This is to be seen in the context of the RBI’s June 7 circular on the resolution of stressed assets. 
 

The circular had said all stressed accounts of over Rs 2,000 crore would come under its purview with immediate effect. 

It will be January 1, 2020, for stressed accounts between Rs 1,500 crore and Rs 2,000 crore, according to the circular, which was silent on cases below Rs 1,500 crore.

An interlinked issue to be weighed is the widening of the ICA to include mutual funds, private equity, alternative investment funds, and platforms with interest in the distressed assets market. 

It was explained that there could be a case for continuity without necessarily widening the room for participants in the ICA by making it clear from the beginning (in specific ICAs) as to where various non-bank entities will stand in the queue. At least this way they can take a call whether to take exposure to a credit or not. 

The issue of lien over the monies lying with banks within a consortium and its appropriation to the detriment of other lenders by any one bank is also to be examined. This is because in several stressed account cases, these sums are deposited with private banks, which have far superior collection and cash management systems compared to state-run banks. Or, in escrow-like arrangements.

The status of offshore lenders in the current ICA scheme, and that of urban-cooperative banks, may also come up for a review. It was specifically pointed out that while the central bank does not want to get into micro management, “the ICA should start moving. There will be winners and losers, but we are now in a position wherein everybody seems to be right from their standpoint”. 

The central bank’s stance all along has been that the onus is on banks to make the ICA work, but the narrative so far on the resolution of bad asset cases has been far from satisfactory. This is despite the RBI making the ICA mandatory for banks under the June 7 circular.

The idea of the mandatory ICA under the central bank’s June 7 circular was to empower banks to take decisions and resolve bad loans without going to the National Company Law Tribunal (NCLT). “If the ICA is still not delivering, then we are not very different from the situation that prevailed under the February 12 circular, which was struck down by the Supreme Court,” said a source.