Banks differ with SBI on inter-creditor pact for lending to companies battling the pandemic

Mumbai: Banks are struggling to create a common pact for lending to companies that will need funds to grow, rejig their loans, and battle the slowdown wrecked by the Covid-19 pandemic. Large private and foreign banks have voiced their reservations against the State Bank of India’s (SBI) proposal to frame an omnibus inter-creditor agreement (ICA) which would be binding on all lenders. Under a rigid and uniform ICA, a bank which is unwilling to give fresh loan in proportion to its share in the total outstanding loan will be required to sell off its exposure and exit the consortium. Many lenders consider such an arrangement to be unfair, sources told ET.77474901“There could be multiple reasons for a bank refusing to participate in enhancing the working capital for a particular borrower. The bank may have exhausted the group exposure limit, or plan to conserve capital, or simply think that taking additional exposure to the borrower is risky,” said a senior banker.Some of the foreign banks are also uncomfortable with the provision for an “uncapped indemnity” in the event of a legal dispute dragging the consortium leader.No consensus on ICA for standard accountsHowever, striking a common ground for a new ICA format has assumed significance with the Reserve Bank of India (RBI) last week laying down the condition for restructuring a loan without categorising it as non-performing asset (NPA).The regulator has said that in cases where the resolution process has been invoked but lending institutions representing not less than 75% by value of the total outstanding credit facilities (fund based as well non-fund based) and not less than 60% by number, do not sign the ICA within 30 days from the invocation, then the invocation will be treated as lapsed. In respect of such borrowers, the resolution process cannot be invoked under this framework announced to address Covid-19 related stress.While ICA signed by banks for defaulting borrowers under the Insolvency and Bankruptcy Code (IBC) is well accepted, there is no consensus on such an agreement for standard or regular accounts. A standard ICA was backed by Piyush Goyal when he held additional charge as finance minister. But, the proposal did not receive regulatory approval.“It’s important that all consortium banks are on the same page for quick decisions and lending a helping hand to borrowers. From that point, the SBI proposal has merit. It’s important to bring certain discipline around standard assets. But one document for all banks and all corporates will not work,” said another banker.Under the circumstances some banks have suggested a two-part ICA, where part-A may be a standard document applicable to all banks while part-B could be bank specific. “There are also suggestions to link the ICA to borrowers’ credit rating and loan amount. There have been discussions. Some of the private banks have been quite vocal in expressing their differences,” said another banker.ET had reported on May 18 on the proposed omnibus ICA soon after it cropped up in a meeting attended by CEOs of several banks. Subsequently, banks have come out with ways to modify a uniform pact and make it more acceptable to a larger number of lenders.

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