Inter-Creditor Agreement – Resolution of Stressed Assets

The problem of Non-Performing Assets (NPAs) has been hindering the growth of the financial system of India for around a decade now and the attempts to solve this problem have been continuously made by the finance ministry, the RBI and the banking system as a whole. The latest attempt was proposed by a committee headed by Punjab National Bank (PNB) chairman Mr. Sunil Mehta on 2nd July 2018. This is the ‘Inter-Creditor Agreement’ (ICA) under Project Sashakt, which is a bank-led bad loan resolution plan for the speedy resolution of stressed assets. According to the proposed plan, lead banks, having the highest exposure to stressed assets, will prepare a well-framed resolution plan with the help of resolution experts. This plan would then be screened by the Indian Banks’ Association (IBA) and would require the approval of IBA as well as 66% of the member banks of the committee. Post the approval, the lead bank would be responsible for the proper execution of the revival plan for the stressed assets. However, this arrangement only applies to bad loans worth INR 50-500 crores.

GROSS NPA

For the NPAs below INR 50 crores, which are usually seen for small and medium enterprises (SME), the committee has proposed a time-bound SME-resolution approach wherein the resolution would be completed by a dedicated team within 90 days of identification of the NPAs.

And for loans above 500 crores, the committee has come up with a new arrangement of Asset Management Company (AMC) and Alternative Investment Fund (AIF). The banks will consolidate their bad loans and NPAs and approach an AMC which will take over their loans for resolution. Those NPAs will be put up for bidding in an open auction for determining the price of the assets and then the objective would be to turn around the assets with the help of resolution professionals and specialists. On the other hand, the AIF will raise funds from domestic and sovereign institutional investors. The committee has also suggested an open asset trading platform for performing as well as non-performing assets.

GRoss npa 2

The interim finance minister Mr. Piyush Goyal has emphasized that apart from the Inter-Creditor Agreement, the general prudential lending norms must be followed or else the problem of bad loans will keep mounting. Also, he suggests that there should be effective communication amongst banks so that if any bank has issues, they can resolve it among themselves.

While the outcome of this agreement remains uncertain at present, it is certain that the BJP government is largely depending upon this agreement for the improvement in the NPA situation in the country as it might become an important factor affecting the general elections due to be held in 2019.



About the author:

Isha

Ms. Isha Varma,

is a distinguished alum from TAPMI, Manipal, batch of 2017-18

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