Inter-creditor agreement to resolve NPAs post-SC order

By Subhash Narayan

New Delhi, April 3 (IANS) The Supreme Court decision voiding the RBI circular on resolution of loan default could push banks into resolving such cases on the basis of an inter-creditor agreement (ICA) reached by 35 banks last year, senior officials here said.

Under a framework named Project Sashakt, a bank-led resolution approach (BLRA) is adopted where the lead banker is given charge of finding a solution for a stressed account. If a resolution is not worked out within 180 days, the stressed assets then move to the National Company Law Tribunal (NCLT).

Banking sources said Sashakt is similar to the Reserve Bank of India's (RBI) void February 12 RBI circular in approach, but is not forced upon all cases of stress and defaults. It follows the BLRA, where banks get to decide how to move forward and resolve accounts within a timeframe.

Banks used the Sashakt framework last year to resolve a few stressed power assets. In fact, out of the 34 power assets referred to them, about 8 were resolved using this approach.

However, the scheme could not proceed further as the RBI circular prevented application of any other scheme for defaults, which instructed banks to strictly follow its direction of resolving an account within 180 days of first default or refer the matter for resolution under the bankruptcy court.

"Project Sashakt can also become the basis of any amended guideline for resolution that RBI may think of post the Supreme Court order. The apex bank could amend the guideline post-consultation with the government that would be specific in nature and not a general rule," the official said.

According to the official, the central bank may also give credence to the ICA on any scheme of resolution, allowing the banks to decide on the most suited action necessary to resolve or restructure an account.

The ICA is a platform for banks and financial institutions to come together and take concerted efforts towards resolving non-performing assets (NPAs or bad loans) under Rs 500 crore.

Project Sashakt was proposed by a panel led by state-run Punjab National Bank (PNB) Chairman Sunil Mehta in June last year. Under it, bad loans of up to Rs 50 crore are to be managed at the bank level, with a deadline of 90 days.

For bad loans of Rs 50-500 crore, banks will enter into an ICA, authorising the lead bank to implement a resolution plan in 180 days, or refer the asset to the NCLT. For loans above Rs 500 crore, the panel has recommended an independent asset management company (AMC), supported by institutional funding through Alternative Investment Funds (AIF).

(Subhash Narayan can be contacted at subhash.n@ians.in)