In SBI We Trust. Inter-Creditor Agreements And The Concentration Of Power

The new ‘Sashakt’ plan proposed by bankers to resolve stressed assets more efficiently will concentrate most decision-making powers in the hands of a few large lenders, particularly State Bank of India.

According to the first of the two lenders quoted above, the structure is similar to the committee of creditors system followed under the Insolvency and Bankruptcy Code. However, given the provisions of the ICA, the role of all lenders, except the lead bank, would be restricted mostly to setting a floor on the value of the asset.

Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services said the new framework tries to address a shortcoming of the joint lenders forum mechanism, where dissent from smaller lenders often delayed decisions. The new mechanism addresses that problem, Parekh told BloombergQuint.

Excessive Concentration Of Power?

The flip side of this could be excessive concentration of decision making powers in the hands of a few banks, with smaller lenders losing autonomy over a key banking function of recovery of bad loans. Additionally, the ability of banks to take haircuts would vary based on their capital position, which could make it tough for a smaller banks to go along with the lead bank’s decision to take a steep haircut.

As such, could a concentration of power in the hands of a few large lenders hurt the interest of other banks?

The managing director and chief executive officer of a mid-sized public sector bank said that smaller banks can still vote against a resolution plan since a majority vote is required to approve the plan. He was speaking on conditions of anonymity. Lenders could also appeal to the oversight committee involved in the resolution process if they feel that due process is not being followed, said this banker.

Under the Sashakt plan, an independent committee of retired bankers, lawyers and investigative officers is envisaged. This committee will examine the process followed in the resolution of individual accounts.

A former senior public sector banker, who serves on the board of a large private bank, said that while private bankers may not fully agree with the concentration of powers in the hands of the lead lender, resisting the inter-creditor agreements could just delay stressed asset resolution further. Besides, private sector banks can choose to sell their exposure to another lender in the consortium or an asset reconstruction company (ARC) to exit from the case if they feel too restricted, the former banker said.

When asked whether other banks are comfortable with the concentration of power in the hands of SBI and a few other lenders, Arijit Basu, managing director, SBI said that it would be too premature to comment on the contours of the inter-creditor agreement since all the lenders are yet to participate in it. At this point in time, the boards of various banks were considering the agreement, but are yet to sign, Basu said.