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To state it in simple words it is a big step taken by the key lenders of the country to tackle the menace of non-performing assets (NPA) or bad loans speedily which has breached Rs. 10 lakh crore mark on a more recent basis. The problem of ever-increasing bad loans in the Indian banking system led to the introduction of the Sashakt resolution plan by the government that came up earlier this month. The Sashakt plan besides other things demanded the establishment of an asset reconstruction company or asset management company for managing bad loans.

Parties to the Inter-creditor agreement

Business Standard report says that 24 lenders led by SBI and PNB on Monday signed an inter-creditor agreement to speed up the resolution of stressed assets in the range of Rs 500 million-Rs 5 billion under consortium lending.

As per the agreement, the ICA is to be entered into by 22 public sector banks that include India Post Payments Bank, 19 private sector banks and 32 foreign banks. Other signatories in the agreement will include 12 leading financial institutions such as LIC, Power Finance Corporation and Rural Electrification Corporation etc.

Arrangement in the Inter-creditor agreement

The inter-creditor agreement or ICA that is the direct result of the government's Sashakt resolution plan or report on bad bank drafted by the Sunil Mehta committee and will work as below:

Herein the lenders in the agreement will jointly appoint a lead lender who will function on behalf of the entire group. The leading lender will then be required to put forth the resolution plan for the non-performing assets (NPAs) before the group and if it is given a go-ahead by two thirds of the lenders, the proposal will qualify to be taken up for resolution of the given account.

As per the Bloomberg Quint report, the resolution through this arrangement will be primarily focused on mid-sized stressed loan or non-performing accounts (NPAs).

Responsibilities of lead lender

The lead lender will shoulder several responsibilities including:

1. Submission of the NPA resolution plan before the overseeing committee. The oversight committee is expected to be created by Indian Banks' Association (IBA) in a month's time.

2. Each resolution plan has to comply with Reserve Bank of India norms, guidelines and applicable laws.

3. Taking decision in respect of the sustainable debt in relation to an NPA account.

4. The pact allows the lead lender to implement the plan in 180 days.

For the services rendered, lead lender will be offered a fee and is shielded from other liabilities.

First progress review under the inter-creditor agreement might be executed after three months of time.

It is to be noted that the inter-creditor agreement or pact will stand terminated in certain situations such as the direct intervention by the Reserve Bank of India.