INTRODUCTION:
India suffering from the NPA problem which is Non-performance Assets. Some necessary steps have been taken to solve this problem. one of the major steps is introducing Intercreditor Agreement between all lenders and borrowers. If some steps are not taken then it may go out of control to recover the fund and disaster may happen for the Indian economy. To protect the rights and priority of lenders, the Reserve bank of India introduce Intercreditor Agreement
Many banks, foreign banks, financial institution, and private sector bank has agreed to approve bring this resolution. it tries to do speedy decisions with a high level of concern capital of RS 50 crore or more.
The framework is required for modification for the conclusion of all Non-Profit Assets. Banks must enter into an Inter creditor Agreement. All the lenders need to secure their debts and have clarity in terms of monetary. It bonds all the parties and clarifies their rights and responsibility when a borrower’s economic volume is destroyed and stress takes place.
Definition of Inter-Creditor Agreement:
“An inter-creditor agreement, or ICA, is a contractual and legally enforceable contract between various lenders within the same capital structure. As there are often different creditors in a single capital structure, the lenders need to agree on the key issues of collateral, payment, lien subordination, debt caps, and remedies if the debtor defaults or seeks bankruptcy protection.”[1]
Importance of Inter-Creditor Agreement
This Agreement helps to resolve and supersede confusion between parties.
The correct and fair market value of capital is defined in the Agreement. Thus proper distribution should be done in case of default.
ICA can prove a worthy Agreement in terms of constraint any term or any pursuing action and recover the debts.
It gives surety to all the lenders as superintend will get their privileges, while the subordinate lender promotes confidence and provide borrower loans.
Who will prepare Intercreditor Agreement?
It is prepared by the lead lender bank as they are providing the maximum amount of credit to the borrower, So the risk is high and the same will be submitted to other lenders for approval. If more than 66%of the majority is approved the resolution is implemented under the supervisory control of the lead banker.
Example:- A person has taken 300 crores of loan total out of this 160 crore of credit is given by SBI and the rest of the amount of loan is given by other financial institutions or other banks. Here highest Amount is given by other Banks. In this case, SBI will prepare an Intercreditor Agreement and the same will be presented in front of other lender banks and more than 66% of the banks who are lending money. Then Agreement will be implemented under the supervision of the lead Banker.
Important clauses must be added in the Agreement to make the contract effective and presentable in the Court Of Law
Exclusive Security:
Sometimes junior lenders may not get the proper benefits so a split collateral Arrangement must be involved in the Agreement. It involves the separation of credit facilities, each lender may secure the ownership of assets in the hands of another person till the dues possessed by that person are accomplished, One particular partition of capital is seized by one of the credit facilities, during the time the secured preference possession of property belonging to another portion of assets. thus is Assets based credit facilities are provided and All lenders are sorted at the time of default.
“Generally, in any deed signed by two or more parties, each party should be aware of critical elements within the agreement. So, a junior lender must achieve a clear ground and identify fundamental issues before the commencement of the transaction”[2]
“Junior lenders must pay attention to how and when the scheduled payments of interest are made. It should also ensure that there are no staggering blockages instituted by the senior lender in case a borrower defaults. Therefore, a junior lender must negotiate for treatments such as limiting the number of blockages on defaults, protection to accelerate debts and perfect remedies, and a clear guideline on when a blockage should begin”.[3]
“The Lenders shall take all necessary actions and steps including the execution of the
Resolution Documents, as may be required for the implementation of the approved
the debt restructuring scheme is undertaken by the
aforesaid broad contours within the agreed timelines”
“The Lead Lender shall provide periodic updates to all the Lenders in relation
to formulation and implementation of the debt restructuring scheme undertaken under the aforesaid broad contours.[4]“
Termination clause must include: In case there is any guidance or law
from the Reserve Bank Of India or any other guidelines authority to terminate the
Agreement.
Termination of the Agreement shall not change the accomplished of any Resolution Plan that is already approved by the particular lead lenders and such permitted Resolution Plan shall keep on to be compulsory for all Lender.
What is Project SASHAKT?
PNB chairman Sunil Mehta has Proposed with its panel led to help consolidate stressed assets was engraved by the government in 2018 and was integrated with an ICA for the resolution of stressed assets.
Every bank must come in an ICA(INTER-CREDITOR AGREEMENT), Approved by the lead bank to execute a resolution plan in 180 days
Delinquency of before rupees 50 crores will be supervised at the bank level and shall with a timeline of 90 days.
For loans above 500 rupees crores, the panel recommended AMC, contributed by INSTITUTIONAL FUNDING through the AIF
To solve the problem of (NPA) which is a Non-Profit Asset the government of India has taken a few steps under project SASHAK . One of the major steps is to introduce “INTERCREDITOR AGREEMENT”
“On June 23, 2019, with the guidance of the Prudential framework, the Indian Bank Association drafted an ICA, including information relating to meetings of lenders, voting matters, repayment to dissenting lenders, and additional funding.”[5]
There are 22 public sector banks and 19 private banks and 32 foreign banks, and 12 major financial intermediaries like LIC
The speedy decision of stressed assets of INR 50 crores or more which are under (Consortium Lending)”it is a lending situation where a single borrower is jointly financed by different lending institutions by grouping together
The resolution plan is prepared by the lender having the highest exposure and the plan will be submitted to another lender for approval plan needs to be approved by a majority of 66%to be implemented.
Conclusion
To protect funds and the rights of lenders inter-creditor Agreement is introduced and banks and financial institutions must enter into Agreement. Carefully examining an inter-creditor Act prior underwriting can be considered for junior lenders. To accomplish this objective only course of action is to negotiate over an unprejudiced advantage and formation of a practical action plan. It is advised, if the junior lender is powerless to reach an agreement on such terms, they hand over the organization or look for an alternative. If the borrower back out then the junior lender has the choice of taking over the project if certain situations are laid out in the agreement.
Author(s) Name: Aashka Somani
References:
Intercreditor Agreement, FINANCIALEDGE [1] https://www.fe.training/free-resources/credit-analysis/intercreditor-agreement/ | accessed on 18 january 2023
INTERCREDITOR AGREEMENT, CFI [2] https://corporatefinanceinstitute.com/resources/commercial-lending/intercreditor-agreement/[2] | accessed on 18 january 2023
Intercreditor Agreement CFI [3]< https://corporatefinanceinstitute.com/resources/commercial-lending/intercreditor-agreement/> | accessed on 18 January 2023
[4]INTERCREDITOR AGREEMENT, THE BANKS, FINANCIAL INSTITUTIONS AND OTHER LENDERS
SET OUT IN SCHEDULE I <https://idbitrustee.com/wp-content/uploads/2019/08/ICA.pdf> accessed on 18 january 2023
Inter-creditor Agreement : all you need to know |ipleader< [5] https://blog.ipleaders.in/inter-creditor-agreement-all-you-need-to-know/ | accessed on 18 january 2023
