Banks finalise inter-creditor agreement to fast-track NPA resolution

Banks, both public and private sector, on Thursday finalised a model “inter-creditor agreement” (ICA) that would set the ground rules for managing consortium lending and multiple-banking arrangements.

The decision was made at a meeting called by Indian Banks Association (IBA), which was also attended by interim finance minister Piyush Goyal, who had accepted the report of the Sunil Mehta Committee earlier this week.
The inter-creditor agreement (ICA) framework that envisages effective communication among lenders will help fast track the resolution process for banks’ non-performing asset that have grown to over Rs9,00,000 crore.
The ICA mechanism, a part of Project Sashakt, is expected to be enforced this month itself, PNB non-executive chairman and lead author of `Project Sashkat’ Sunil Mehta said, adding that the day-long deliberations focused on ‘Project Sashakt’, and how to strengthen banks in terms of credit capacity, credit culture and portfolio.
‘Project Sashakt’ refers to the recently unveiled five-pronged strategy to deal with non-performing assets.
The agreement will be taken to boards of respective banks and would be cleared in couple of days, Sunil Mehta said after the meeting.
The framework will authorise 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.
Mehta said banks of all sizes, including from the private sector, participated in the meeting.
"They went through discussions and it was fruitful to conclude the inter-creditor agreement. It will go live this month," he said, adding that the inter-creditor agreement will a legal document and enforceable in any court of law.
Mehta said the inter-creditor agreement is a building block as "we implement various options".
He said the banks also agreed to strictly follow the 66-per cent norm. This means the inter-creditor agreement will stand if 66 per cent of the lenders in a consortium agree to it.
"The way we have constructed this is that as long as 66 per cent of the banks who have exposure, take the decision, then they will be able to take a deciding step forward with the majority supporting them," Mehta said.
The biggest benefit flowing from an ICA is that bankers will not try to “undercut” each other and in the process lead to everyone losing, said the CEO of a private sector bank.
Certain borrowers tend to pitch one bank against another in the consortium or multiple-banking arrangements, they said.
A common framework between the lenders will end such practices, bankers said.
On the issue of setting up asset management companies under the Project Sashakt, Mehta said the matter is being looked into and next step will be discussed in the future.
Under project Sashakt, independent asset management companies (AMCs) and steering committees would be set up for faster resolution of bad loans in the banking system.
The project is based on the recommendations of Sunil Mehta committee.