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Indian Banks’ Association tweaks Inter Creditor Agreement

  • Category
    Economy
  • Published
    27th Jun, 2019

The Indian Banks’ Association has tweaked the inter-creditor agreement (ICA) that was framed by the Sashakt Committee, to keep it in line with the revised guidelines of the Reserve Bank of India (RBI) on stressed assets resolution.

Context

The Indian Banks’ Association has tweaked the inter-creditor agreement (ICA) that was framed by the Sashakt Committee, to keep it in line with the revised guidelines of the Reserve Bank of India (RBI) on stressed assets resolution.

About

Background

  • The total stress in the Indian banking sector, including write-offs, is likely to be around Rs 16.30 lakh crore.
  • As of March 31, 2018, provisional estimates suggest that the total volume of gross NPAs in the economy stands at Rs 10.35 lakh crore. About 85% of these NPAs are from loans and advances of public sector banks. For instance, NPAs in the State Bank of India are worth Rs 2.23 lakh crore.

Revised Guidelines of the Reserve Bank of India (RBI) on Stressed Assets

  • Earlier, the stressed asset norms were applicable only for banks, now it is applicable on banks, Small Finance Banks as well as NBFCs.
  • Earlier, the default of even one day had to be reported. Now, lenders are given 30 days to start working on a resolution plan.
  • Earlier, banks had to refer borrower to NCLT if it failed to resolve the account within 180 days. Now, it is made voluntary for the lenders to initiate legal proceedings.
  • Earlier, consensus was required on the resolution plan, now agreement of 75% of lenders by debt value and 60% lenders by number is needed.

Changes brought by IBA in ICA

  • The revised norm had mandated that if there was a default by any borrower, all lenders should review the borrower account within 30 days of the default, which is termed ‘review period’, and to chalk out a resolution plan. It has been made mandatory for all the lenders to enter into an ICA within the review period.
  • RBI had said ICA must provide that any decision agreed to by lenders representing 75% by value of total outstanding credit facilities and 60% of lenders by number

Inter Creditor Agreement

  • It 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. The lenders will jointly appoint a lead lender who will function on behalf of the entire group.
  • 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.

Indian Banks Association

  • Established in 1946
  • HQ - Mumbai
  •  It is an association of Indian Banks and financial Institutions.
  • The members comprise of:
    • Public Sector Banks.
    • Private Sector Banks.
    • Foreign Banks having offices in India.
    • Co-operative Banks.
    • Regional Rural Banks.
    • All India Financial Institution.

Objective – Strengthening, development and coordination of the Indian Banking.

Project Sashakt

  • Project Sashakt was proposed by a panel led by PNB chairman Sunil Mehta.
  • Bad loans of up to ? 50 crore will be managed at the bank level, with a deadline of 90 days.
  • For bad loans of ? 50-500 crore, banks will enter an inter-creditor agreement, authorizing the lead bank to implement a resolution plan in 180 days, or refer the asset to NCLT.
  •  For loans above ? 500 crore, the panel recom­mended an independent AMC, supported by institutional funding through the AIF. The idea is to help consolidate stressed assets.

Stressed Assets

Stressed assets = NPAs + Restructured loans + Written off assets

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