Banks, FIs sign inter-creditor pact to fast-track bad loans' resolution

New Delhi: Banks and FIs, including SBI and LIC, on Monday entered into an overarching inter-creditor agreement (ICA) to fast track the resolution of stressed assets, with Finance Minister Piyush Goyal describing the move as a 'huge step forward' in addressing the banking industry's problems.

The ICA is being signed by 22 public sector banks (including India Post Payments Bank), 19 private sector banks and 32 foreign banks. Besides, 12 major financial institutions (FIs) and intermediaries, like LIC, HUDCO, PFC and REC, are also signatories to the pact.

It will cover cases of stressed assets worth at least Rs 50 crore under consortium lending.

"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," Goyal said, adding that several others including the ICICI Bank would be joining the agreement after seeking board approval.

ICA was drawn up by banks themselves and is a reflection of bankers' resolve to collectively find a solution to the problems of the banking sector, he said.

"This is a huge step forward. It is a historic occasion. There is absolutely no parallel system. This is within the framework of IBC that the entire process has been worked out and it will help in faster resolution within extant guidelines and rules," Goyal said.

The agreement, as suggested by the Sunil Mehta committee, has aligned its processes with every instant laws, rules and regulations of the land and the RBI.

Goyal further said that ICA, which has been drawn up by the banks themselves, is truly a reflection of the consciousness that has now come into the Indian banking system.

He said there were often occasions that a good resolution plan, which would have helped saved jobs, save national assets and recover large amounts of loans, were held up by one or two creditor for months and years, thereby eroding value of the banking system.

"...we finally have the banks recognising the importance of working as a team to collectively find solution to the banking problem and ensuring an orderly credit flow in the future so that we don't have to see the kind of problems that we inherited in 2014 in terms of large amount of NPAs which have cost the nation dear and which have affected the credibility of India," Goyal said.

Under the ICA, which is part of project 'Sashakt', each resolution plan will be submitted by the lead lender to an Overseeing Committee.

As per the ICA, "The lead lender, that is the lender with the highest exposure, shall be authorised to formulate the resolution plan, which shall be presented to the lenders for their approval".

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.

The agreement said that each resolution plan that is formulated in terms of the ICA will be in compliance with the Reserve Bank of India circular and all other applicable laws and guidelines.

"The operating guidelines for functioning of the Overseeing Committee including the terms of reference shall be as approved (and amended from time to time) by 66 per cent by number of the Lenders that are a party to this Agreement," it said.

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.

"Pursuant to the recommendations of Sunil Mehta Committee and under the aegis of Indian Banks' Association (IBA), an Inter-creditor Agreement (ICA) has been prepared which shall serve as a platform for the banks and financial institutions to come together and take joint and concerted actions towards resolution of stressed accounts," said the agreement.

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.

"Each of the relevant lenders 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," the ICA said.

In case a lender dissents, the lead lender will have the right but not the obligation to arrange for 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 buy-out in respect of the entire facilities held by other relevant lenders, it said.

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 it.