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Business News/ Industry / Banking/  ARCs seek tweaks in inter-creditor agreement to protect their interests
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ARCs seek tweaks in inter-creditor agreement to protect their interests

Asset reconstruction companies (ARCs) aren't happy with the 'standstill clause' which prohibits lenders from selling their loans to anyone but other banks and NBFCs once a borrower is referred for resolution under inter-creditor agreement

Sunil Mehta, non-executive chairman of Punjab National Bank.Premium
Sunil Mehta, non-executive chairman of Punjab National Bank.

Mumbai: Asset reconstruction companies (ARCs) are not keen on participating in the ambitious inter-creditor agreement (ICA) unless the Indian Banks’ Association (IBA) modifies the accord to protect their interests, two people aware of the development said. ARC representatives told IBA executives at a recent meeting that their participation will be contingent on such modification, the people mentioned above said on condition of anonymity.

Under ICA, the lead bank is authorized to implement a resolution plan in a time-bound manner.

The terms of the plan must be approved by 66% of the lenders, which will then be final and binding on all others.

The agreement also says that the lead bank will submit the resolution plan to the overseeing committee constituted by IBA.

According to the first of the two people, ARCs are not happy with the “standstill clause" which prohibits lenders from selling their loans to anyone but other banks and non-banking financial companies (NBFCs) once a borrower is referred for resolution under ICA.

The person said since loans cannot be sold to ARCs, they could lose significant business opportunities in stressed assets.

Banks have pinned their hopes on ICA to resolve a large chunk of the 10 trillion of bad loans.

Signed by more than two dozen lenders last month, the ICA is part of Project Sashakt, a five-pronged strategy to resolve bad loans proposed by a committee led by Punjab National Bank non-executive chairman Sunil Mehta.

An ARC typically buys stressed loans from banks at a discount in exchange for cash or a mix of cash and security receipts (SRs), redeemable on recovery.

ARCs also charge banks a yearly management fee of 1-2%; recoveries through this route can take up to eight years. There are 24 ARCs in India.

Under the ICA, a copy of which is publicly available, a lender is not permitted to “transfer or assign their facility to any person, save and except to a bank or non-banking financial company (NBFC) that agrees to enter into a deed of accession (if it is not already a party to this agreement) and be bound by the resolution plan".

“IBA told us that the current regulations do not permit sale of assets by one ARC to another. Since many ARCs are currently classified as lenders to some stressed assets, sale of these loans to another ARC is not permissible," the first person said, adding the ARCs have informed the IBA that it may be allowed since it would only amount to one ARC consolidating its share in the borrower’s debt by taking over more loans.

The second person cited above pointed out that while the ICA is available on the stock exchanges, ARCs have not yet received an official copy from the IBA and cannot sign the agreement before receiving one. “Another issue raised in the meeting was that ARCs are not included in the list of 85 lenders expected to sign the agreement," he said.

Currently, the agreement lists members from public sector banks, private banks, foreign banks and other lenders like Power Finance Corp. (PFC) and Rural Electrification Corp. (REC).

According to the second person, ARCs have been told that their names could be included through a deed of accession.

“We have sought some time to respond," he said.

IBA did not respond to an email seeking comment.

A third person aware of the meeting said he could not comment on specific demands raised by ARCs, but confirmed they have sought more time from IBA and are yet to sign the agreement.

“Following purchase of loans from banks, these ARCs are now lenders to some large stressed assets and therefore having them on board will hasten resolution plan approvals," the third person explained.

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ABOUT THE AUTHOR
Shayan Ghosh
Shayan Ghosh is a national editor at Mint reporting on traditional banks and shadow banks. He has over 12 years of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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Published: 20 Aug 2018, 03:05 AM IST
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