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Regulators set to sort out vexed inter-creditor pacts

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MUMBAI: India’s banking, insurance and securities regulators are set to meet to iron out differences that have stymied resolution plans as inter-creditor agreements have become contentious for lenders. More and more non-banking finance companies, having secured their portion of lending, are averse to surrender their rights to the banks' consortium. "The IBA has written to the RBI on the matter because the regulators have to come together and solve this issue.

The new amendment does not specify other debt holders like mutual funds and insurance companies.

It only specifies banks, asset reconstruction companies, NBFCs and small finance banks.

Since the other creditors are not regulated by RBI, it requires the intervention of others to solve this issue," said a senior banker. In the case of DHFL, mutual funds have asked Sebi’s opinion on whether to join the intercreditor agreement.

RBI, in its June 7th circular, has said that the Prudential Framework for Resolution of Stressed Assets is applicable to banks, financial institutions and NBFCs. “Some other players like mutual funds and insurance companies governed by other regulators should also be assimilated and integrated in the framework for more effective implementation of the resolution process,” said Hari Hara Mishra, director, UV Asset Reconstruction. Since the IL-FS default, apart from banks, insurance and mutual funds are taking haircuts on their investments.

The Association of Mutual Funds in India has laid down norms on treatment of downgraded debt and suggested haircuts once a paper falls below investment grade. “ICAs are getting signed but review meeting has to take off,” said Siby Antony, chairman, Edelweiss Asset Reconstruction.

“It is early days.

The differences can be ironed out if all lenders come to one platform and decide who should take ownership to monitor the developments.” The debate is whether bond holders like mutual funds have to sign the ICA.

There are institutional holders and retail holders.

Companies like mutual funds and insurance companies will also have to take a hit without having any say in the restructuring.

No lender is willing to take the hit and this hobbles resolution. “Technically these investors are financial creditors and can hence take the defaulter to the bankruptcy court which could stall the process of restructuring,” said a senior lawyer currently advising banks.

“Some creditors are opposing giving the lead bank an indemnity to take a decision.

Ideally these issues should have been solved at the stage of making the trust deed.

Now, it looks like they are going to become bigger and either the regulators have to come together or the government has to step in.” The inter-creditor agreement prepared in the case of DHFL says that all lenders acknowledge and agree that from time to time certain other banks, NBFCs, other financial institutions and asset reconstruction companies may decide to the agreement and shall be bound by the terms of this agreement as a ‘lender’ and shall acquire and assume the same rights and obligations.




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