On July 23rd, 2018, Indian banks and financial institutions signed an Inter-Creditor Agreement (ICA) aimed at resolving bad loans in a more efficient and timely manner. The agreement is seen as a crucial step towards addressing the country’s mounting non-performing assets (NPAs) problem, which has been a significant cause of concern for the Indian economy.
The ICA, also known as a ‘co-lending agreement’, is a legal document that seeks to formalize the lending relationship between different creditors involved in a particular loan. The agreement allows for the resolution of bad loans through a structured approach, with the aim of maximizing the value of the assets under consideration.
The signing of the ICA follows the announcement made earlier this year by the Reserve Bank of India (RBI) to create a Joint Lenders’ Forum (JLF) for the resolution of stressed assets. The ICA is seen as a necessary step towards operationalizing the JLF.
The ICA is expected to bring about a change in the approach of creditors towards bad loans. Under the agreement, creditors will have to sign an ‘inter-creditor pact’ that outlines the rules for decision-making and dispute resolution. The agreement will also contain provisions for the formation of an ‘Overseeing Committee’ (OC) to monitor the resolution process.
The ICA has been widely welcomed by industry players, who see it as a major step towards improving creditor coordination and resolving bad loans in a more timely manner. The ICA is also seen as a positive move towards encouraging greater lending by banks and financial institutions, which have been hesitant to lend in the past due to fear of default.
One of the key features of the ICA is that it allows for ‘standstill’ agreements, whereby creditor rights are suspended for a certain period to enable negotiations between creditors and borrowers. Standstill agreements are seen as a crucial step towards resolving bad loans, as they provide breathing space for borrowers to recover from financial difficulties and repay their debts.
In summary, the Inter-Creditor Agreement signed by Indian banks and financial institutions is a significant step towards addressing the country’s mounting non-performing assets problem. The agreement formalizes the lending relationship between different creditors and allows for the resolution of bad loans through a structured approach. It is expected to encourage greater lending by banks and financial institutions, while providing a more efficient and timely framework for resolving bad loans.
