Sashakt Panel On Bad Loans

  • 11 Jun 2019

Why is it in News?

Sashakt committee has praised the mandatory norm of Inter Creditor Agreement (ICA) for its effectiveness in tackling bad loans.

Relevance of the News: It highlights the committee formed for addressing bad loans crisis and its observations.

More about the News:

  • Sashakt Committee has observed that the mandatory norm of ICA allows banks to decide resolution strategy outside the Insolvency and Bankruptcy Code (IBC) which will accelerate the resolution process.
  • The committee has recommended that the existing ICA, which is executed by 35 banks/ FI’s, must be adopted to incorporate the revised voting threshold and other changes in decision making that are stipulated by the RBI recently.
  • RBI has recently changed norms which state that if 75% of lenders by value of the loans or 60% by number agree to a resolution plan then the plan can be adopted.

Sashakt Committee:

Sashakt committee is a group consisting of chiefs of 5 Indian public sector banks pioneered by PNB chairman Sunil Mehta. This committee had forwarded ‘Project Sashakt’ last year, a five-pronged strategy to resolve bad loans, which has been accepted by the government, which aims at

Project Sashakt:

  • The five-pronged resolution route includes:
  • oOutlining an SME resolution approach
  • oBank-led resolution approach
    AMC/AIF led resolution approach
  • oNCLT/IBC approach
  • oAsset-trading platform
  • This 5 pronged approach will be applicable to smaller assets with exposure up to Rs 50 crore, mid-size assets between Rs. 50 crore and Rs. 500 crore, and large assets with exposure of Rs 500 crore and more which have a potential for turnaround.
  • Bad loans of up to Rs. 50 crore will be managed at the bank level, with a deadline of 90 days.
  • For bad loans of Rs. 50-500 crore, banks will enter an inter-creditor agreement, authorizing the lead bank to implement a resolution plan in 180 days, or refer the asset to National Company Law Tribunal.
  • For loans above Rs. 500 crore, the panel recom­mended an independent asset management company (AMC), supported by institutional funding through the alternative investment fund (AIF). The idea is to help consolidate stressed assets.

Inter Creditor Agreement (ICA):

  • ICA is an agreement hashed out by public and private banks in July 2018 to deal with the bad loans crisis in Indian banking sector. It is a part of Project Sashakt.
  • ICA framework envisages effective communication among lenders and lays down some ground rules for multiple-banking arrangements and consortium lending.
  • Some large borrowers often take loans from multiple banks for a single project and in case of failure of the project all creditors face loss from that one common project’s failure. ICA allows all creditor banks to communicate with each other and commonly arrive at a resolution plan for the project.
  • ICA makes sure that there is effective, good communication amongst banks and if any bank has a difference with another bank, then they will resolve it among themselves.
  • ICA was earlier voluntary for banks but recent RBI guidelines have made ICA mandatory for banks.