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Indian banks, financial institutions sign agreement to speed up bad loan resolution

Jul 24, 2018 09:24 IST
Indian banks, financial institutions sign agreement to speed up bad loan resolution

Indian banks and financial institutions signed an inter-creditor agreement on July 23, 2018 to fast-track the resolution of stressed assets of Rs 500 crore or above that are under consortium lending.

The ICA was prepared in accordance to the recommendations of the Sunil Mehta Committee and under the aegis of Indian Banks' Association (IBA). It is a part of Project Sashakt, which aims to strengthen the credit capacity, credit culture and credit portfolio of public sector banks.

The agreement has been approved by boards of respective lenders.

Signatories of ICA

The ICA has been signed by 22 public sector banks including SBI, PNB and India Post Payments Bank, 19 private sector banks and 32 foreign banks.

The signatories also included 12 major financial institutions such as Life Insurance Corporation of India (LIC), HUDCO, PFC, and REC.

Objective

The agreement was prepared to serve as a platform for the banks and financial institutions to come together and take joint and concerted actions towards resolution of stressed account.

The main objective of the ICA is to resolve stressed assets fast and it will primarily focus on NPAs in the 50 crore to 500 crore bracket.

The framework will deal separately with stressed assets of 500 to 2,000 crores or more.

The agreement will also enable lenders to move expeditiously and protect their interests.

Key Highlights

Under the pact, each resolution plan will be submitted by the lead lender to an Overseeing Committee.

The lead lender, the lender with the highest exposure, shall be authorised to formulate the resolution plan, which shall be presented to the lenders for their approval.

Under the deal, the decision making will be by way of approval of 'majority lenders'- those with 66 per cent share in the aggregate exposure.

Once a resolution plan is approved by the majority lenders, it will be binding on all the lenders that are a party to the ICA.

Each resolution plan that is formulated in terms of the agreement shall be in compliance with the RBI circular and all other applicable laws and guidelines.

The operating guidelines for the functioning of the Overseeing Committee including the terms of reference shall be as approved (and amended from time to time) if 66 percent of the banks in the group agree to it.

The lead lender will submit the resolution plan along with the recommendations of the Overseeing Committee to all the relevant lenders.

The framework authorises the lead bank to implement a resolution plan in 180 days and the leader would then prepare a resolution plan including empanelling turnaround specialists and other industry experts for operation turnaround of the assets within RBI's stipulated time-frame of 180 days.

The agreement will be operational by July end.

Other Details

Each of the relevant lenders shall have to appoint the lead lender to act as its agent under and in connection with the formulation and implementation of any resolution plan in the manner contemplated in this agreement.

In case,  a lender dissents, the lead lender will have the right but not the obligation to arrange for the buy-out of the facilities of the dissenting lenders at a value that is equal to 85 per cent of the lower of liquidation value or resolution value.

The dissenting lenders can exercise such right of the buy-out in respect of the entire facilities held by other relevant lenders.

This agreement will be terminated in case there is any guidance or prescription from the RBI or any other regulatory or governmental authority to terminate this agreement.

Background

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

As of March 2018, there were close to 3 trillion worth of bad loans in the 50 to 500 crore category and 2 trillion under 50 crore ticket size.

Hence, Union Finance Minister Piyush Goyal described the signing of the ICA as a huge step towards addressing the banking industry's problems.

He said that the resolution over dissolution approach will strengthen banks and businesses, protect jobs and help the economy grow even faster.

 

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