Top lenders come together to sign inter-creditor agreement for bad loan resolution

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In an effort to speed up the process of stressed asset resolution, several Indian banks and financial institutions such as SBI, PNB and LIC came together today to sign an inter-creditor agreement (ICA). Top lender State Bank of India was among the many banks which signed the agreement.

An ICA is an agreement between two lenders agreeing in advance on how their competing interests in a common borrower will be dealt with. The agreement, aimed at resolving the bad loan menace the country, was signed after receiving conditional approval from the Reserve Bank of India (RBI). The agreement has been signed by 22 public sector banks, 19 private sector banks and 32 foreign banks, along with 12 major financial intermediaries.

The pact is part of project ‘Sashakt’ introduced by the Modi government aimed at resolving the problem of stressed assets which involves creation of one or more widely held asset management companies for loans above ₹500 crore. The government described the project as “a banks-led, five-pronged, comprehensive project that doesn’t involve any regulatory forbearance or an immediate government involvement”. The ICA replaces the Joint Lenders Forum (JLF), which was scrapped by the RBI earlier this year.

According to the framework prescribed by the ICA, the lead lender will be the lender with the highest exposure to the account, who will then act on behalf of the consortium by determining the proportion of sustainable debt in a company and also formulate the resolution plan. Once the proposed resolution has been submitted to the overseeing committee, the plan needs to be approved by 66% of the lenders. The resolution plan approved by the majority of the lenders will be final and binding, which means that all relevant lenders must take necessary action to implement the plan within the given timeline.

The non-performing assets (NPAs) or bad loans in the banking sector crossed ₹9 lakh crore by the end of December 2017 and the RBI had warned of further worsening of the situation in case no action was taken in due time.

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