Mumbai: Twenty-four banks led by the State Bank of India on Monday signed the inter-creditor agreement that aims to fast-track the resolution of bad loans.

In a stock exchange filing, SBI said that its board has approved the signing of the inter-creditor pact. Seventeen public sector banks, five private sector banks and two other financial institutions have signed the agreement.

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.

The new framework authorizes the lead bank to implement a resolution plan in a time-bound manner.

The Mehta committee has also proposed the setting up of a national asset management company, which will raise multiple sector-specific investment funds to invest in stressed assets.

The signing of the inter-creditor agreement is the first step in the implementation of Project Sashakt.

According to the agreement, lenders with exposure to stressed accounts will appoint a lead bank as its agent to formulate a resolution plan.

The role of the lead lender varies from determining the proportion of sustainable debt to finalising the resolution plan.

The terms of the resolution plan has to be approved by 66% of the lenders, and will then be final and binding on all other lenders. The agreement also says that the lead bank will submit the resolution plan to the overseeing committee constituted by the Indian Banks’ Association.

“Pursuant to the recommendations of the Sunil Mehta committee on resolution of stressed assets and under the aegis of Indian Banks’ Association, an inter-creditor agreement has been prepared which shall serve as a platform for the banks and financial institutions to come together and take joint and concerted actions towards resolution of stressed accounts," said a statement from the Indian Banks’ Association (IBA).

When the resolution plan is in the works by the lead lender, a standstill clause will come into force which debars the other lenders from initiating any civil action against the borrower. It, however, does not preclude lenders from initiating any action for criminal offences.

Lenders not in favour of the resolution plan can either sell their exposure to any bank or non-banking financial company or it can even sell the exposure to the lead bank.

“The lead lender shall have the right (but not the obligation) to arrange for the buy-out of the facilities of the dissenting lenders at a value that is equal to 85% of the lower of liquidation value or resolution value, in accordance with the following terms," the agreement states.

The dissenting lender also has the option to arrange for a buy-out of loans from other lenders at 125% of the liquidation or resolution value, whichever is higher.

The lead bank will receive a mutually agreed upon fee for its services. The fee will be paid in proportion of its outstanding exposure.

“Lender, its employees, directors, representatives and agents shall not be liable and shall not be held responsible (except in the case of wilful default, gross negligence, or fraud) for any loss, liabilities or damages whatsoever, to any relevant lender," it added.

The resolution plan will be in conformity with the new framework released by the Reserve Bank of India on 12 February.

The new framework is applicable to accounts with exposures of over ₹ 2,000 crore where lenders must implement the resolution plan within 180 days

“If there is a change in the RBI regulations or any other regulations, that will have precedence over the agreement, so that it is in alignment with the regulations at that point in time (and not 12 February)," said Mehta. “The objective is to look at legacy stressed assets, but also resolution of other stressed assets."

Under the inter-creditor agreement, lenders will look at resolving accounts with exposure between ₹ 50 crore and ₹ 2,000 crore.

According to the IBA, nearly 1,200 accounts will fall under the agreement, which will be implemented by end of July.

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