Mumbai: Asset reconstruction companies believe that the challenge with the new circular on debt restructuring will be signing the inter-creditor agreement with all lenders. According to the Reserve Bank of India’s new framework for stressed assets, banks and non-banking finance companies have to enter into an ICA within 30 days of borrower default.

“The challenge with the new circular will be signing the ICA on a case-to-case basis. The guidelines say this has to be done within 30 days of the account becoming an NPA and this is a challenge considering the diverse nature of lenders and their respective security. The ICA essentially becomes a distribution agreement and that is usually a big bone of contention amongst lenders," said Eshwar Karra, CEO, Kotak Special Situations Fund pvt ltd.

The ICA mandated by the RBI was earlier recommended by the Sashakt committee and signed by 36 financial institutions in 2018. ARCs, however, were not part of this agreement. According to RK Bansal, chief executive officer of Edelweiss ARC, the difference lies in that the ICA under the Sashakt committee was a general agreement and may not be applicable under the RBI circular.

Bansal also believes that challenge of finding a resolution to stressed assets still persist even after the release of the new circular on debt restructuring.

“General challenges to finding a resolution to stressed assets still persist. That has nothing to do with the circular. How does one resolve the assets, which have industry specific and structural issues like for instance in the case of power assets? There you have to find a holistic solution," he added.

The new norms came into effect after the Supreme Court struck down the earlier guidelines which made it mandatory for lenders to take all default cases to the National Company law Tribunal. The court order came in on a petition filed by the central bank challenging the Allahabad High Court order which had asked it and the finance ministry to treat the power sector NPAs separately as their woes were mostly driven by external factors.

Power sector companies, which were affected the most by the circular, argued that their outstanding loans of 5.65 lakh crore (as of March 2018) were a result of factors beyond their control such as unavailability of fuel and cancellation of coal blocks by the apex court/government and non-payment by state-run discoms.

According to Icra, the February 12 circular impacted loans worth 3.8 lakh crore across 70 large borrowers of which 2 lakh crore of 34 borrowers were in the power sector. Of this, 92% were classified as NPAs as of March 2018 and also had provisions made of over 25-40%.