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Why banks are unhappy with inter-creditor agreement

August 21, 2018 22:34 IST

The heartburn is over six sensitive issues

Illustration: Uttam Ghosh/

All’s not well among banks despite a public show of solidarity on the stated merits of the freshly minted inter-creditor agreement (ICA) to clean up the dud-loan mess which has topped Rs 10 trillion at end of March this year.

The heartburn is over six sensitive issues: lack of a well-defined exit clause from the mechanism; status of third-party and current security-sharing terms; an option to stay out of a fresh funding scheme to a beleaguered borrower; a tweak of buyout valuations to on-board the concerns of lead-bankers’ and dissenters’; the scope of the indemnity cover given to the lead-bank in a rehabilitation proposal; and to open the gates to waive in asset reconstruction companies within the framework.


The Indian Banks’ Association’s legal advisor, the New Delhi-based Cyril Amarchand Mangaladas, is to hold an interaction with bankers at The Oberoi in the Capital on September 7 to get a sense of the emerging topography. The agenda is to ‘discuss out-of-court restructuring, including via ICA’.

Sunil Mehta, the architect of the ICA, who is also the non-executive chairman of Punjab National Bank, will be the keynote speaker.

Others on the mike include Cyril S Shroff, the legal firm’s managing partner, and Venkat Nageswar, SBI Caps’ managing director and chief executive officer.

A line of communication is to be opened with Arun Jaitley on his return to North Block sometime this month.

A senior banker involved in the backchannel talks says, “It (ICA in its current form) penalises the prudent and puts them on a par with those who have been less diligent or rigorous.

"Giving up control to the lead-lender, and eventually being subject to a 66 per cent majority vote (by size of exposure) will, in most cases, be with the same five or six banks which will be present as the largest lenders.

"And hence, it may end up getting a majority of lenders (by number) to share the burden of the bigger banks to help smoothen their exposure problems”.

It’s a clear divide between the large and small banks over the ICA minutiae; the latter feel they will have to carry the can.

It’s worth noting there was no deadline as such to sign the ICA even as whispers now abound that that the ICA itself may be reworked to get a better buy-in from banks of all hues.

The drama now shifts to the composition of an overseeing committee (OC) - on paper, the lead-bank will have to give weight to its suggestions.

The punt: heft in the OC will help the Davids lean against the Goliaths who will get to have a decisive say to quarantine worn-out borrowers in a rehabilitation pen.

It is a wild throw of the dice as there is little to suggest as on date that the membership of the OC will not mirror the power equations within the wider banking space.

To highlight what he considers to be “coercive”, a senior banker points to the lack of an exit route from the ICA tent - it hinges on an order from Mint Road, regulatory authority or government body (the last two have not been specifically identified); or that 75 per cent of lenders at the systemic level (who have signed the ICA) agree to let you walk out of it.

“A hurdle is if the ICA in operation were to include incremental funding when cleared by 66 per cent of those who sit around the spit even."

Explains a banker who’s been working the phonelines: “What’s not being understood here is the impact of an exposure is not uniform across banks; it’s relative to specific balance sheets.”

The treatment of exclusive third-party collateral held by a bank is another bone of contention.

Under the ICA, it is to be disclosed and thrown into the common pool to hammer out a resolution.

The worry here is the discounted price may land banks which got into these deals at the end of a bad bargain.

Resolution valuations wherein dissenters to a proposal are to be bought out at 85 per cent of the liquidation value or at the net-present value (whichever is lower), while it’s 125 per cent if they are to do so from others (whichever is higher in this case) is seen as a headache too.

“In effect, I will be bought over at a discount, but will have to pay a premium if I were to do a buyout (of assets). Let’s have a common denominator to all this so that an average can be worked out,” the banker said.

Raghu Mohan in Mumbai