Previous Year Question
What was the purpose of the Inter-Creditor Agreement signed by Indian banks and financial institutions recently?
To lessen the Government of India’s perennial burden of fiscal deficit and current account deficit
To support the infrastructure projects of Central and State Governments
To act as an independent regulator in case of applications for loans of ₹50 crore or more
To aim at faster resolution of stressed assets of ₹50 crore or more which are under consortium lending
Correct Answer: D
Detailed Solution
Indian banks and financial institutions signed the Inter-Creditor Agreement, or ICA, in 2018. It formed part of Project Sashakt, the Government-approved framework for the resolution of stressed assets.
Option (d) is correct.
When several banks jointly lend to one borrower, the borrower’s financial distress requires coordination among all lenders before a resolution plan can be implemented. Differences among banks regarding their interests and preferred course of action may delay resolution and cause further deterioration in the value of the asset.
The ICA established a predetermined decision-making process among lenders in such cases. It was intended to facilitate the resolution of stressed assets of ₹50 crore or more under consortium or multiple-lender arrangements.
Its principal features included:
identification of a Lead Lender;
examination of the borrower’s financial position and preparation of a resolution plan;
making a plan approved by the prescribed majority binding on signatory lenders;
an exit or debt-sale mechanism for a dissenting lender under specified conditions; and
encouragement of time-bound resolution before resorting to judicial or insolvency proceedings.
The ICA was not an independent regulatory authority. It was a contractual arrangement among lenders. Its purpose was not to approve new loan applications, finance government infrastructure projects or reduce the fiscal and current account deficits.