Banks agree to resolve stressed assets quickly

Banks agree to resolve stressed assets quickly

News

1. 24 public, private and foreign banks have signed inter-creditor agreements (ICA) to resolve stressed assets.

Important facts

2. The move comes after RBI dismantling of all the existing resolution mechanisms, such as the joint lenders’ forum in its 12 February circular
3. RBI asked lenders (Banks, NBFC) to start resolution for the assets even if the default was by one day.
4. It had also mandated that if the resolution plan was not finalised within 180 days, the account had to be referred for bankruptcy proceedings.
5. About Inter-creditor agreements (ICA)

• Inter-Creditor Agreement (ICA) was framed under the aegis of the Indian Banks’ Association
• It follows the recommendations of the Sunil Mehta Committee on stressed asset resolution
• Both Bank and NBFC could be part of ICA
• ICA is primarily focused on the ₹50 crore-₹500 crore and the ₹500 crore-₹2,000 crore categories

6. Functioning of ICA

• The ICA is applicable to all corporate borrowers who have availed loans for an amount of ₹50 crore or more under consortium lending / multiple banking arrangements
• The lender with the highest exposure to a stressed borrower will be authorised to formulate the resolution plan which will be presented to all lenders for their approval.
• The decision making shall be by way of approval of ‘majority lenders’ (i.e. the lenders with 66% share in the aggregate exposure).
• Once a resolution plan is approved by the majority, it shall be binding on all the lenders that are a party to the ICA
• Dissenting lenders can either sell their exposure to another lender at a 15% discount or buy the entire exposure of all the banks involved, at a 25% premium

7. One of the major concern with ICA is to achieve consensus among the lending banks on what should have been a common resolution plan which would have benefited the banks
8. The Mehta committee had estimated ₹2.1 lakh crore of stressed assets in the ₹50 crore to ₹500 crore category. The total stress in public sector banks is estimated at ₹10.6 lakh crore, as on March 31, 2018.