In accordance with the Reserve Bank of India`s (RBI) Prudential Framework for Resolution of Stressed Assets, the Association of Indian Banks (IBA) has entered into an agreement between creditors (ICA) that provides details on lender meetings, voting issues, payments to dissenting lenders and additional financing. The agreement, known as the Inter-Creditor Agreement (ICA), was concluded under the aegis of the Association of Indian Banks and follows the recommendations of the Sunil Mehta Committee on the resolution of stressed assets. Lenders such as the State Bank of India, Bank of India and Corporation Bank have already signed the pact. Indian banks trying to sell their troubled assets now have one less hurdle to overcome. A group of banks, including the public sector, the private sector and foreign banks, signed an agreement between creditors on Monday to push for the rapid resolution of bad debts on their balance sheets. Under the agreement, a majority representing two-thirds of loans in a consortium of lenders should be sufficient to remove any objections to the dissenting lenders` resolution process. Minority lenders who suspect that they are short-circuited by other lenders can now either sell their assets to a willing buyer for a discount or buy loans from other lenders for a premium. The agreement between creditors aims to liquidate credit accounts of 50 crore or more in size, under the control of a group of lenders. It is part of the government-approved “Sashakt” plan to address the problem of solving non-performing loans. In recent years, Indian banks have been forced by the Reserve Bank of India to identify problematic assets in their books, but their resolution has remained a challenge.
According to banker Sunil Mehta, who headed a body that recommended the plan, disagreement between joint lenders is the main problem to resolve stressed assets. The government hopes that the problem of the holdout, for which the objections of some lenders prevent an agreement between the majority lenders, will be solved by the agreement reached between the creditors. In a tweet, Finance Minister Piyush Goyal said: “A massive step towards the resolution of the NPAs. Twenty-four public, private and foreign banks have signed agreements to settle the most stressed assets under Sashakt Inter. This resolution solution will strengthen banks and businesses, protect jobs and help the economy grow even faster. Each lender ensures that at each lender`s meeting, it is represented by competent and competent people to make decisions on the spot without deferring them for internal authorization. Bankers are not sure whether it is necessary to rewrite or insert new clauses and sign a new agreement. Adjust your preferences and receive a personalized story recommendation based on your interest. Such an agreement could encourage banks to develop a more rapid plan to resolve stressed assets. This is an improvement over the previous model, which relied exclusively on the common lenders forum to reach consensus among creditors.
It makes sense for joint lenders who want to avoid the impasse to agree on the basic rules of debt settlement before granting loans to a borrower. But requiring the main lender to submit a temporary resolution plan can have unintended consequences.