Mains Paper 3: Economy | Mobilization of resources
From UPSC perspective, the following things are important:
Prelims level: Inter- Creditors Agreement
Mains level: NPA problem and measures for its resolution
Speeding up action on Stressed Assets
- Leading lenders of the country signed an agreement among themselves to grant power to the lead lender of the consortium to draw up a resolution plan for stressed assets.
- The plan would be implemented in a time-bound manner before bankruptcy proceedings kick in, as was the mandate of the Reserve Bank.
- The move comes after the RBI in its circular dismantled all the existing resolution mechanisms, such as the joint lenders’ forum, and asked lenders to start resolution for the asset even if the default was by one day.
Inter-Creditor Agreement (ICA)
- The agreement, known as Inter-Creditor Agreement (ICA) was framed under the aegis of the Indian Banks’ Association and follows the recommendations of the Sunil Mehta Committee (PNB) on stressed asset resolution.
- 24 public, private and foreign banks have signed ICA agreements under Sashakt to resolve stressed assets.
- Lenders including State Bank of India, Bank of India, and Corporation Bank have already signed the pact.
- The ICA has been executed by 24 lenders, primarily those who have obtained their board approvals.
- Other lenders and NBFCs are expected to execute the ICA shortly after getting approval from the respective Boards.
Massive step to resolve NPAs
- This resolution over dissolution approach will strengthen banks & businesses, protect jobs & help economy grow even faster.
- 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.
- It had mandated that if the resolution plan was not finalised within 180 days, the account had to be referred for bankruptcy proceedings.
Working of the ICA
- 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.
Building consensus over a common resolution plan
- One of the major issues identified was a lack of consensus among the lending banks over a common resolution plan which would have helped in getting the asset back into the resuscitation mode rather than allowing it to impair over a period of time.
- ICA primarily focuses on the ₹50 crore-₹500 crore and the ₹500 crore-₹2,000 crore categories. If there are any specific assets of more than ₹2,000 crore, it will be dealt separately by ICA.
- 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.