Under the agreement, lenders will appoint a lead bank to formulate a resolution plan for stressed assets. Seventeen public sector banks, five private sector banks and two other financial institutions have signed the agreement. This will aid into faster resolution of bad assets and will help recovery of NPA money. This will lead to lower provisioning requirement, and hence, would improve these banks' asset quality and profits.
The agreement is part of Project Sashakt, a five-pronged strategy to resolve bad loans, proposed by a committee led by Punjab National Bank non-executive chairman Sunil Mehta.
Under the inter-creditor agreement, lenders will look at resolving accounts with exposure between Rs50cr and Rs2,000cr.
Lenders who have signed the agreements include Union Bank of India, Bank of Baroda, Canara Bank, Punjab National Bank. No foreign bank or large private banks has signed this deal as yet, but officials from Indian Banks’ Association (IBA) said more banks are expected to join later this week after they receive approval from their board. Big private banks such as HDFC Bank, ICICI Bank, Kotak Mahindra Bank and Axis Bank are yet to sign this deal.
As per the terms of the agreement, if 66% of the lenders agree to a resolution plan, it would be binding on all lenders. A dissenting creditor could sell its loan at a discount of 15% of the liquidation value to other lenders or buy the entire loan at 125% of the resolution plan agreed to by other lenders. RBI wanted an assurance from lenders that ICA would not contradict the February 12 circular on resolution of bad loans.
Explaining the importance of this move, FM Piyush Goyal tweeted, “This resolution over dissolution approach will strengthen banks and businesses, protect jobs, and help the economy grow even faster.”
Elaborating on its necessity, he claimed “When the Insolvency and Bankruptcy Code was introduced, the country's banking sector was going through a serious crisis. PM Narendra Modi spoke about the dire financial stress that the banking system was facing due to indiscriminate and absolutely baseless lending during 2008-14.”