Inter Creditor Agreement
24, Jul 2018
Lenders of the country signed an agreement known as Inter-creditor agreement (ICA) among themselves to grant power to the lead lender of the consortium to draw up a resolution plan for stressed assets.
What Is ICA?
- ICA is an agreement among banks that have dues from a borrower in stress. The pact mandates the lead bank to formulate a resolution plan that will be executed in a time bound manner.
- It was framed under the aegis of Indian banks association, following the recommendation of Sunil Mehta Committee on stressed assert resolution.
Who are all the participant?
Around 22 public sector banks (including India Post Payments Bank), 19 private lenders and 32 foreign banks signed the inter-creditor agreement (ICA) to fast track the resolution of stressed assets.
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 arrangement.
Procedures of ICA:
- Under the ICA, which is part of project ‘Sashakt’, each resolution plan will be submitted by the lead lender to an Overseeing Committee.
- The pact gives more powers to the lead lender in a consortium and allows a resolution plan to be approved if 66 percent of the banks in the group agree to it.
- 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 % share in the aggregate exposure.
- The lead lender will submit the resolution plan along with the recommendations of the Overseeing Committee to all the relevant lenders.
- 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.
- 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.
- 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.
- The plan envisages creating a large asset management company (AMC) with wider participation from banks that will provide equity investments to the new AMC. An Alternative Investment Fund (AIM) is also on the cards that will mobilise funds for the buyout of stressed assets.
- The plan talks about dealing with stressed assets of up to Rs 50 crore within the bank itself; an inter-creditor agreement with a 180-days deadline for Rs 50-500 crore loans; and an independent AMC for loans above Rs 500 crore.