Two dozen lenders including State Bank of India and Punjab National Bank on Monday signed an inter-creditor agreement (ICA) to speed up the resolution process of stressed assets in the range of Rs 500 million to Rs 5 billion under consortium lending.
The ICA is to be signed by 22 public sector banks (including India Post Payments Bank), 19 private sector banks and 32 foreign banks. Besides, 12 major financial intermediaries, like Life Insurance Corporation, Power Finance Corporation and Rural Electrification Corporation, are also signatories, according to the agreement.
V G Kannan, chief executive, Indian Banks’ Association (IBA), said the ICA had been executed by 24 lenders, primarily those who had obtained their board approvals. Others are expected to execute the ICA shortly after getting approvals from the respective boards.
The IBA is expected to form an oversight committee in a month. The first review of progress made under ICAs might happen after three months, bankers said.
ALSO READ: Can Project Sashakt take off in time to prevent NPAs from moving to IBC?
The faremwork is part of the Project Sashakt (or the report on bad bank submitted earlier this month), drafted by the Sunil Mehta committee. Mehta, also non-executive chairman of PNB, said foreign banks had to go to their headquarters for consent to sign the ICA. They may sign the overarching ICA or opt to sign on a transaction basis.
Under the pact, each resolution plan will be submitted by the lead lender (for the borrower account) to the overseeing committee.
The lead lender, with the highest exposure, shall be authorised to formulate the resolution plan, which shall be presented to the lenders for approval. Under the ICA framework, decision making will be by way of the approval of 'majority lenders', that is those with 66 per cent shares in aggregate exposure.
Once the majority of the lenders approve a plan, it will be binding on all the lenders that are party to the ICA.
Each resolution plan will have to be in compliance with Reserve Bank norms, applicable laws, and guidelines.
The lead lender will submit the resolution plan, along with the recommendations of the overseeing panel, to all the relevant lenders.
The framework authorises the lead bank to implement a resolution plan in 180 days. The lead lender could empanel specialists and other experts for turning around assets within the RBI's stipulated time-frame of 180 days. In case a lender dissents, the lead lender will have the right but not the obligation to arrange for buying out the facilities of the dissenting lenders. It could be bought at a value equal to 85 per cent of the liquidation value or resolution value, whichever is lower.
The dissenting lenders could exercise such rights of buyout in respect of the entire facilities held by other relevant lenders, it said. This agreement will be terminated in case there is any such guidance or prescription from the RBI or any other regulatory or governmental authority.
Public sector executives said the ICA did provide room for speedy resolution. But it had risks like unsecured creditors, which are not part of the ICA, mounting legal challenge.
Finance Minister Piyush Goyal tweeted: “A massive step taken to resolve NPAs. 24 public, private& foreign banks have signed inter-creditor agreements under Sashakt to resolve stressed assets. This resolution over dissolution approach will strengthen banks and businesses, protect jobs and help economy grown even faster.”
Non-performing assets (NPAs) or bad loans crossed Rs 10 trillion at the end of March last year and the RBI has warned of the situation worsening. The gross NPA ratio of banks is likely to rise from 11.6 per cent in March 2018 to 12.2 per cent by the end of the current financial year, according to the Financial Stability Report released in June.
FIGHTING BAD LOANS
24 lenders including State Bank of India and PNB sign inter-creditor agreement (ICA)
ICA is being signed by 22 public sector banks (including India Post Payments Bank), 19 private sector banks and 32 foreign banks
12 major financial intermediaries, like LIC, Power Finance Corporation and Rural Electrification Corporation, also signatories
Others expected to execute the ICA after getting approvals from respective boards
First review of progress made under ICAs might happen after three months
Framework authorises the lead bank to implement a resolution plan in 180 days
The ICA replaces the joint lenders’ forum and prevents minority lenders from blocking resolution plans
The ICA is to be signed by 22 public sector banks (including India Post Payments Bank), 19 private sector banks and 32 foreign banks. Besides, 12 major financial intermediaries, like Life Insurance Corporation, Power Finance Corporation and Rural Electrification Corporation, are also signatories, according to the agreement.
V G Kannan, chief executive, Indian Banks’ Association (IBA), said the ICA had been executed by 24 lenders, primarily those who had obtained their board approvals. Others are expected to execute the ICA shortly after getting approvals from the respective boards.
The IBA is expected to form an oversight committee in a month. The first review of progress made under ICAs might happen after three months, bankers said.
ALSO READ: Can Project Sashakt take off in time to prevent NPAs from moving to IBC?
The faremwork is part of the Project Sashakt (or the report on bad bank submitted earlier this month), drafted by the Sunil Mehta committee. Mehta, also non-executive chairman of PNB, said foreign banks had to go to their headquarters for consent to sign the ICA. They may sign the overarching ICA or opt to sign on a transaction basis.
Under the pact, each resolution plan will be submitted by the lead lender (for the borrower account) to the overseeing committee.
The lead lender, with the highest exposure, shall be authorised to formulate the resolution plan, which shall be presented to the lenders for approval. Under the ICA framework, decision making will be by way of the approval of 'majority lenders', that is those with 66 per cent shares in aggregate exposure.
Once the majority of the lenders approve a plan, it will be binding on all the lenders that are party to the ICA.
Each resolution plan will have to be in compliance with Reserve Bank norms, applicable laws, and guidelines.
The lead lender will submit the resolution plan, along with the recommendations of the overseeing panel, to all the relevant lenders.
The framework authorises the lead bank to implement a resolution plan in 180 days. The lead lender could empanel specialists and other experts for turning around assets within the RBI's stipulated time-frame of 180 days. In case a lender dissents, the lead lender will have the right but not the obligation to arrange for buying out the facilities of the dissenting lenders. It could be bought at a value equal to 85 per cent of the liquidation value or resolution value, whichever is lower.
The dissenting lenders could exercise such rights of buyout in respect of the entire facilities held by other relevant lenders, it said. This agreement will be terminated in case there is any such guidance or prescription from the RBI or any other regulatory or governmental authority.
Public sector executives said the ICA did provide room for speedy resolution. But it had risks like unsecured creditors, which are not part of the ICA, mounting legal challenge.
Finance Minister Piyush Goyal tweeted: “A massive step taken to resolve NPAs. 24 public, private& foreign banks have signed inter-creditor agreements under Sashakt to resolve stressed assets. This resolution over dissolution approach will strengthen banks and businesses, protect jobs and help economy grown even faster.”
Non-performing assets (NPAs) or bad loans crossed Rs 10 trillion at the end of March last year and the RBI has warned of the situation worsening. The gross NPA ratio of banks is likely to rise from 11.6 per cent in March 2018 to 12.2 per cent by the end of the current financial year, according to the Financial Stability Report released in June.
FIGHTING BAD LOANS
24 lenders including State Bank of India and PNB sign inter-creditor agreement (ICA)
ICA is being signed by 22 public sector banks (including India Post Payments Bank), 19 private sector banks and 32 foreign banks
12 major financial intermediaries, like LIC, Power Finance Corporation and Rural Electrification Corporation, also signatories
Others expected to execute the ICA after getting approvals from respective boards
First review of progress made under ICAs might happen after three months
Framework authorises the lead bank to implement a resolution plan in 180 days
The ICA replaces the joint lenders’ forum and prevents minority lenders from blocking resolution plans
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