Banks Propose Master Inter-Creditor Agreement Under RBI’s New Stressed Asset Rules

Indian banks have initiated the process of signing a master inter-creditor agreement, which will govern the resolution process for stressed assets under the Reserve Bank of India’s new rules.

Dissenting Lenders

A key part of the inter-creditor agreement is to lay down rules to deal with dissenting lenders. An earlier framework, where banks set up joint lender forums to resolve individual assets, was riddled with long delays due to a handful of lenders dissenting.

On this, the inter-creditor agreement says:

• The Resolution Plan shall provide for payment of “not less than liquidation value” to dissenting lenders.
• The liquidation value will be decided by an independent valuer.
• The dissenting lender can also agree to sell or transfer their loan facilities to any lender part of the resolution plan at a mutually agreed-upon price.

At present, the proposed inter-creditor agreement will apply to domestic banks. However, in time, NBFCs, other financial institutions and asset reconstruction companies may accede to the agreement, the draft said. Foreign lenders, with exposure to a borrower in foreign currency, must either seek RBI permission or refinance their exposure in Indian rupees to be part of the process.

A senior lawyer, who spoke on condition of anonymity, said that not all creditors will be willing to sign the inter-creditor agreement in the current form. Asset reconstruction companies, debt funds and foreign banks will be reluctant to get stuck in a long drawn out resolution process without any legal recourse to invoke securities that they may hold against the loans.

However, Subodh Sadana, partner at Khaitan & Khaitan believes that should the inter-creditor agreements become effective, banks may make a greater attempt to finalise resolution plans. “Under the new RBI framework and with the inter creditor agreement taking the lead to finalise a resolution plan, before the case is referred under the IBC, lenders would first be interested to see if the corporate defaulter can be revived and whether it can run successfully,” Sadana said. “There is an incentive to restructure the debt exposure under the new framework and only if lenders feel there is a low possibility of revival will they refer it to IBC.”