Banks sign agreement for resolution of bad loans

More than 20 banks signed an agreement which will lead to a faster resolution of bad loans while more could join by the end of the week. Earlier this month a government-appointed panel proposed a ‘inter-creditor agreement’ to cut record levels of non-performing assets in in the economy.

This agreement was proposed after it came to light that at times smaller lenders in a lending consortium were creating roadblocks for speedier resolution.

Union Finance Minister Piyush Goyal on Monday said that the signing of the Inter-Creditor Agreement (ICA) by the public and private sector banks as well as foreign banks for the effective resolution of assets is a `huge step` for the entire banking federation.

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“But almost the entire banking system and prominent NBFC like REC, PFC are all joining the interbank creditor arrangement which has held back fast and effective resolution of assets for a decade in the past,” said Goyal.

“There was often occasion that a good resolution plan which could have helped save hundreds and thousands of job which in turn could have helped saved national assets created which could have helped bank recover large amounts of loan who are held up by one-two creditors for months thereby eroding value of the banking system,” he added.

Goyal said that this Interbank-Creditor Arrangement, which was drawn up by the bank themselves, is truly a reflection of bankers’ resolve to collectively find a solution to the problems of the banking sector.

The agreement gives a bigger say to the lead lender in a consortium and allows a resolution plan to be approved if 66% of the banks in the group agree to it. Dissenting lenders have the option to sell their stressed loans to a company at a discount, or buy out loans to that entity from all other lenders at a premium.

Top lender State Bank of India was among banks which signed the agreement.

India’s banks had 12.5 percent of their total loans categorised as non-performing or restructured at the end of March, according to central bank data.

The central bank in February this year withdrew half a dozen loan restructuring schemes and tightened rules to steer more companies to bankruptcy courts.

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