Banks, financial institutions sign inter-creditor agreement for swift resolution of bad loans

In a bid to ensure swift resolution of non-performing assets, around 22 public sector banks (including India Post Payments Bank), 19 private lenders and 32 foreign banks on Monday signed the inter-creditor agreement (ICA) to fast-track the resolution of stressed assets. Finance Minister Piyush Goyal described the move as a ‘huge step forward’ in addressing the banking sector’s bad loans. The agreement was also signed by 12 major financial institutions like LIC, HUDCO, among others.

The inter-creditor agreement is aimed at the resolution of loan accounts with a size of ₹50 crore and above that are under the control of a group of lenders. It is part of the “Sashakt” plan approved by the government to address the problem of resolving bad loans.

The agreement is based on a recommendation by the Sunil Mehta committee that looked into the resolution of stressed assets.

The agreement says if 66% of lenders by value agree to a resolution plan, it would be binding on all lenders. The dissenting creditors will, however, have the option to sell their loans to other lenders at a discount of 15% to the liquidation value, or buy the entire portfolio paying 125% of the value agreed under the debt resolution plan by other lenders.

The agreement says each resolution plan would be submitted to an overseeing committee comprising experts from the banking industry. For dissenting creditors, the agreement says the “lead bank has the right, but not the obligation, to arrange the buyout of the loan facilities at a value that is equal to 85% of the liquidation or the resolution value —whichever is lower.”

Dissenting creditors can also exit by selling their loans to any entity at a price mutually arrived at between the lender and buyer.

The agreement has a standstill clause wherein all lenders are barred from enforcing any legal action against the borrower for recovery of dues. During the standstill period, lenders are barred from transferring or assigning their loans to anyone except a bank or finance company.

The standstill provision will be operative for 180 days from the reference date — the RBI had asked lenders to resolve their restructured loans within 180 days beginning March 1 or refer those to the bankruptcy court. However, the provision would not prevent lenders from acting against borrowers or directors for a criminal offense. Lenders are in the process of getting this inter-creditor agreement approved by their boards.

The agreement is a “huge step forward” in tackling the bad loan issue as it is drawn up by banks themselves and is a reflection of bankers’ resolve to collectively find a solution to stressed asset mess. Almost the entire banking system and prominent NBFCs like REC, PFC are joining the ICA which has held back fast and effective resolution of stressed assets for decades in the past.

The non-performing assets (NPAs) or bad loans in the banking sector crossed Rs 9 lakh crore at end-December 2017 and the Reserve Bank of India has warned of further worsening of the situation.

The biggest obstacle to bad loan resolution is the absence of buyers who can purchase stressed assets from banks, and the unwillingness of banks to sell their loans at a deep discount to their face value. Unless the government can solve this problem, the bad loan problem is likely to remain unresolved for some time to come.

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