Inter Creditor Agreement Rbi Circular

The Reserve Bank of India (RBI) has recently issued a circular regarding inter-creditor agreements (ICAs) for resolving stressed assets in the Indian banking system. The circular comes as a welcome relief for banks struggling with a rising tide of non-performing assets (NPAs) and bad loans.

An inter-creditor agreement is a contract between two or more lenders outlining the terms of their collaboration when dealing with a borrower in financial distress. In the past, these agreements were not always effective due to the lack of a legal framework and the absence of a clear process for implementing them.

The RBI’s circular on ICAs seeks to address these issues by laying down a set of guidelines for banks to follow when entering into such agreements. The circular mandates that all lenders holding a share of the debt of a distressed borrower must sign an ICA within 30 days of the first default. The agreement must include provisions for the resolution of the stressed asset, including a timeline for the implementation of the resolution plan.

In addition, the circular also requires that the resolution plan be approved by a majority of lenders holding at least 75% of the debt in value and 60% in number. This ensures that the plan is accepted by a broad base of lenders and avoids any holdouts that may derail the resolution process.

The RBI’s circular also provides for the creation of an overseeing committee, comprising of lenders appointed by the majority in value of the creditors. This committee will be responsible for implementing the resolution plan, including deciding on the valuation of the underlying assets, and the terms and conditions of restructuring or recovery.

In summary, the RBI’s circular on ICAs is a step forward in the resolution of stressed assets in the Indian banking system. By providing a legally binding framework for lenders to collaborate on resolving distressed loans, the circular is expected to improve the effectiveness of the resolution process and reduce the burden of NPAs on the banking system. Banks should begin to embrace the guidelines set forth by the RBI and work collaboratively with other lenders to resolve their non-performing assets.