How long will it take for RBI's loan-recast plan to see the light of day?

Shaktikanta Das (left), and K V Kamath, who heads the panel to decide the financial terms of the one-time loan recast, will have to ensure that it does not lead to evergreening of accounts
How long will it take for the first loan-recast plan — under the scheme announced by the Reserve Bank of India (RBI) on August 6 — to see the light of day? Frankly, nobody has an answer; a good many senior bankers even feel it may turn out to be a non-starter.

 
Let’s take the inter-creditor agreement (ICA) on which hinges the recast programme.

 
You get a glimpse of its progress only in one central bank publication — the Financial Stability Report of December 2019. The report said that as of June 2019, an ICA is yet to be signed for exposures amounting to Rs 33,610 crore, while the same has been signed with respect to aggregate exposures of Rs 96,075 crore. And a resolution plan has been implemented in the case of just a single borrower, with a reported exposure of Rs 1,617 crore.

 
Says Sanjay Agarwal, senior director at CARE Ratings: “Resolution plans under the ICA framework have been taking longer than anticipated, as the multiplicity of lenders or classes of lenders have created lengthy approval processes and differing agendas on the risk-reward matrix.”

 
Adds Veena Sivaramakrishnan, a partner at Shardul Amarchand Mangaldas & Co: “The signing of an ICA has always been controversial, as it is not a requirement which mandatorily binds all lenders. By specifically recognising that there could be lenders which do not sign an ICA, and laying down that there has to be information sharing amongst all lenders (not just those who sign the ICA); and also that such lenders should resolve disputes themselves without a reference to the central bank, the banking regulator seems to have taken note of the practical issues that it continues to pose.”

 
Devil in the details

 
Take the March 1, 2020 and 30-day default threshold — the underlying assumption is that only those companies which have availed of a moratorium would come forward, or need this debt recast. This may not necessarily be correct, as there could be companies whose pre-Covid financial situation has worsened. Denial of a recast could also lead to litigation on such differentiation.

 
The central bank is categorical in its August 6 circular on recast that in cases where the resolution process has been invoked, but an ICA has not been signed within 30 days, it will be treated as having lapsed. And the process cannot be invoked again under this framework. There’s a significant cost attached to such a lapse — banks will have to keep a provision of 20 per cent of the debt on their books, or as required in accordance with extant income recognition norms, “whichever is higher.”

 
In the case of non-banking financial companies (NBFCs), they are not to get a loan recast from banks. This is surprising, because NBFCs were asked to provide a moratorium to their borrowers. In the case of NBFCs, you have a peculiar situation now — their liabilities side remains blocked, even as they are expected to offer a recast to their clientele. Then, again, you have the notification by the Insolvency and Bankruptcy Board of India last week, which allows for multiple compliant plans to be put up for vote. While this amendment is welcome, the point is that banks have found it tough to shake hands on any stressed assets proposal.

 
What may be in store

 
How is consensus to be arrived at under the ICA framework for a recast under the RBI scheme, when it has remained a non-starter all along?

 
Says Nikhil Shah, managing director at Alvarez & Marsal (India): “The challenge in implementation is that the scheme only governs banks, financial institutions, NBFCs (assets side) and housing finance companies; it does not cover bondholders, insurance companies, mutual funds, and pension funds which may also be a financial creditor to a company.” He adds that it is incumbent on the government to enable each of the relevant regulators — the Securities and Exchange Board of India, Pension Fund Regulatory and Development Authority, and the Insurance Regulatory and Development Authority of India — to provide their constituents the appropriate incentives to sign the ICA and implement a sustainable resolution.

 
The chief financial officer at a leading company notes that the inability of lenders to arrive at a common understanding is hurting India Inc. Senior officials (especially in private banks) are of the view that it is better to walk away from the ICA mechanism altogether. “I will take that 20 per cent provisioning hit and write it back when things improve, rather than waste time,” says a banker. What is unsaid is that a large part of the capital raised by private banks (six of them have raised more than Rs 50,000 crore so far) may well go towards cleaning up their books rather than towards growth.

 
What about capitalisation of state-run banks, given the haircuts they have to perforce take? “Capitalisation is not the answer for all situations. Given that the supremacy of the commercial wisdom of creditors has been recognised under the IBC (Insolvency and Bankruptcy Code) and in the resolution framework for Covid-19-related stress, creditors would be better off if they exercised such wisdom swiftly, keeping the commercial nature of the banking business in mind,” notes Divyanshu Pandey, a partner at J Sagar Associates.

 
Bankers expect the expert committee for restructuring under the chairmanship of K V Kamath to indicate uniform parameters which can be adopted by banks across the board for determining the necessity of implementing a resolution plan. “If uniform criteria are adopted, it will help in expediting the timelines, as there is little scope for difference in approach being adopted by each lending institution”, points out a banker. This, again, is an indicator that a logjam may well be on the cards.
Whichever way you look at it, the recast scheme has “dead-on-arrival” written all over it.


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