Inter-Creditor Agreement - Banks Resolution

July 25, 2018
1 year

Why in news?

More than a dozen of lenders led by State Bank of India recently signed the inter-creditor agreement (ICA).

What is the agreement on?

  • The agreement is part of the proposed Project Sashakt.
  • “Sashakt” plan is approved by the government to address the problem of resolving bad loans.
  • The objective is to use this ICA for faster facilitation of resolution of stressed assets.  
  • It is aimed at the resolution of loan accounts with a size of Rs. 50 crore and above that are under the control of a group of lenders.

How did it evolve?

  • Over the last few years, stressed assets resolution has been a challenge, despite RBI's consistent direction to banks.
  • A panel led by banker Sunil Mehta identified the disagreement among joint lenders as the biggest problem in resolution.
  • It recommended the bank-led resolution approach in the form of inter-creditor agreement.
  • This is an improvement on the earlier model of solely relying on the joint lenders’ forum to arrive at a consensus.

What are the provisions?

  • If 66% of the lenders agree to a resolution plan it would be binding on all lenders.
  • A ‘dissenting creditor’ is that which votes against or abstains from voting for the resolution plan approved by the committee.
  • A dissenting creditor could sell its loan at a discount of 15% of the liquidation value to other lenders.
  • Liquidation value is the amount at which a company could sell its assets and settle liabilities.
  • Another option is to sell their loans to any person at a price mutually arrived between dissenting lender and the buyer.
  • However, it cannot sell it to an asset reconstruction company.
  • The agreement has a standstill clause wherein all lenders are barred from enforcing any legal action against the borrower.
  • During standstill period, lenders are also barred from transferring or assigning their loan to any other person except a bank or finance company.

What are the concerns?

  • The obligation on the lead lender to come up with a time-bound resolution plan can have unintended consequences.
  • Banks may be compelled to engage in a rush sale of stressed assets due to arbitrary deadlines.
  • This will work against the interests of lenders looking to get the best price for their stressed assets.
  • Besides, the biggest challenge to bad loan resolution is the absence of buyers to purchase stressed assets.
  • There is also the unwillingness of banks to sell their loans at a deep discount to their face value.


Source: Economic Times, The Hindu

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