Bad loan resolution plans set to be made binding on dissenting creditors

A majority of lenders in the country have agreed to sign an inter-creditor agreement that restricts dissenting creditors from blocking a bad loan resolution plan.

This is in line with the Project Sashakt that will enable faster resolution of non-performing assets (NPAs) outside of the insolvency and bankruptcy courts.

VG Kannan, CEO of Indian Banks’ Association (IBA) told Moneycontrol, “We expect most banks to come on board, both public and private sector banks, even foreign banks have shown intent and have agreed to the plan.”

As many as 56 creditors are set to sign the inter-creditor agreement, according to a report in the Economic Times.

The agreement says that if 66 percent of lenders by value agree to a resolution plan for an NPA account, it would be binding on all lenders.

The dissenting creditors will, however, have the option to sell their loans to other lenders at a discount of 15 percent to the liquidation value, or buy the entire portfolio paying 125 percent of the value agreed under the debt resolution plan by other lenders.

A senior public sector banker told Moneycontrol this will help banks to come out with a resolution for sure as the dissenters can leave without blocking the resolution.

This comes almost a week after the announcement of Project Sashakt, a five-pronged strategy, based on a recommendation by the Sunil Mehta committee that looked into resolution of stressed assets.

Mehta, the non-executive Chairman of Punjab National Bank, along with State Bank of India (SBI) Chairman and a few other senior bankers presented the plan before the interim Finance Minister Piyush Goyal last week.

A key part of the plan includes all lenders signing the legally binding agreement, which also transfers most decisions related to bad loan resolution to the lead lender.

“The idea is to reduce the procrastination because of the few lenders and give the power of attorney to the lenders and subsequently, if they (some lenders) do not agree…This is basically a master agreement, maybe not for all cases,” Kannan said.

Project Sashakt

The plan allows resolution of bad loans outside of the bankruptcy courts with larger NPA accounts going to an asset management company (AMC) or an alternative investment fund (AIF).

The Sashakt plan will concentrate most decision-making powers in the hands of a few large lenders.

Romesh Sobti, CEO and MD of IndusInd Bank, at a post-results conference, said, “Even in the case of SDR or CDR (old resolution mechanisms), it was based on the majority lenders’ approval. Therefore, we will be willing to surrender (asset under) the inter-creditor agreement in the interest of faster resolution.”

Ramaswamy Meyyappan, chief risk officer of IndusInd Bank said, “Basically, this is about the majority lenders’ view. There is a lead bank model it is a procedure which is similar to the IBC model. There is also an overseeing committee comprising of banking experts… Sometimes just because of a few lenders, the process doesn’t go through.”

Bad loan resolution plans set to be made binding on dissenting creditors

Project Sashakt was announced as banks need to resolve before next month or within 180 of default of a loan account as per the Reserve Bank of India (RBI) circular released on February 12.

The central bank circular mandates banks to refer the unresolved loan accounts to the bankruptcy courts.

Lenders fear the asset value may erode if there are no buyers at bankruptcy court.

source: moneycontrol