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Fighting NPA: Inter-Credit Agreement

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. The inter credit agreement is signed between a group of banks to push for a speedy resolution of non-performing assets on their balance sheet. 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.
Inter-Credit Agreement is a part of the ‘Sashakt’ plan drafted by Sunil Mehta Committee and approved by government aims at resolving bad loans with a size ₹ 50 crores or above. Under the pact, The lead lender, with the highest exposure, shall be authorised to formulate the resolution plan, which shall be presented to the lenders for approval. According to the agreement, the 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. The majority lender representing the two third of the loans within the consortium can override the objections of minority dissenting lenders, while the minority interests are protected allowing them either to sell their assets at a discount or to buy at a premium.

The need of Inter-Credit Agreement

Recognition of troubled assets have been made by Indian banks under the compulsion of RBI but their timely resolution has remained a challenge due to disagreements between lenders. Inter-Credit Agreement solve this holdout problem. The agreement is a modification of the earlier consensus-based model. It is logical for joint lenders to set ground rules prior to lending to avoid deadlock later. This approach facilitates faster resolution of bad loans and strengthens banks and businesses, protect jobs and help the economy grow faster.

The challenges

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. But the obligation on the lead lender for time-bound resolution may result in a quickfire sale to meet an arbitrary deadline and may work against the interest of lenders looking for best price for their stressed asset. It also holds risks like unsecured creditors, which are not part of the ICA, mounting legal challenge. Meanwhile, the biggest obstacle to the resolution of the stressed asset is the absence of buyer who can purchase bad loan and unwillingness of banks to sell their assets at a deep discount. Unless government resolve this problem, the NPA issue remains unsolved.