TOPIC OF THE DAY –
” Cosmetic Repair: On Inter-Creditor Agreement “
Indian banks trying to sell their troubled assets now have one less hurdle to cross. A group of banks, including public sector, private sector and foreign banks, signed an inter-creditor agreement on Monday to push for the speedy resolution of non-performing loans on their balance sheets. According to the agreement, a majority representing two-thirds of the loans within a consortium of lenders should now be sufficient to override any objection to the resolution process coming from dissenting lenders. Minority lenders who suspect they are being short-changed by other lenders can now either sell their assets at a discount to a willing buyer or buy out loans from other lenders at a premium. The inter-creditor agreement is aimed at the resolution of loan accounts with a size of ₹50 crore and above that are under the control of a group of lenders. It is part of the “Sashakt” plan approved by the government to address the problem of resolving bad loans. Over the last few years, Indian banks have been forced by the Reserve Bank of India to recognise troubled assets on their books, but their resolution has remained a challenge. According to banker Sunil Mehta, who headed a panel that recommended the plan, disagreement between joint lenders is the biggest problem in resolving stressed assets. The government hopes that the holdout problem, where the objections of a few lenders prevent a settlement between the majority lenders, will be solved through the inter-creditor agreement. Such an agreement may persuade banks to embark more quickly on a resolution plan for stressed assets. This is an improvement on the earlier model, which relied solely on the joint lenders’ forum to arrive at a consensus among creditors. It is, in fact, logical for joint lenders who want to avoid a deadlock to agree on the ground rules of debt resolution prior to lending to any borrower. But the obligationon the lead lender to come up with a time-bound resolution plan can have unintended consequences. Banks may be compelled to engage in a quick-fire sale of stressed assets due to arbitrary deadlines on the resolution process. This will work against the interests of lenders looking to get the best price for their stressed assets. Also, it is often in the interest of the majority of creditors to take the time to extract the most out of their assets. Meanwhile, the biggest obstacle to bad loan resolution is the absence of buyers who can purchase stressed assets from banks, and the unwillingness of banks to sell their loans at a deep discount to their face value. Unless the government can solve this problem, the bad loan problem is likely to remain unresolved for some time to come.
WORDS AND MEANINGS –
1) Consortium
Meaning: An organization of several businesses or banks joining together as a group for a shared purpose.
Example: A consortium of textile manufacturers.
2) Override
Meaning: Use one’s authority to reject or cancel (a decision, view, etc.).
Example: “the courts will ultimately override any objections”
Synonyms: Disallow, Overrule
Antonyms: Allow, Accept
3) Dissenting
Meaning: Hold or express opinions that are at variance with those commonly or officially held.
Example: “two members dissented from the majority”
Synonyms: Diverge, Differ
Antonyms: Assent, Agree
4) Buy out
Meaning: To buy a part of a company or building from someone else so that you own all of it.
Example: Allied Chemicals have been trying to buy out their competitor’s share in the target company.
5) Recognise
Meaning: Identify from knowledge of appearance or character.Acknowledge the existence, validity, or legality of.
Example: “the defence is recognized in British law”
Synonyms: Identify, Admit
Antonyms: Forget, Overlook
6) Holdout
Meaning: An act of resisting something or refusing to accept what is offered.
Example: “a defiant holdout against a commercial culture”
7) Persuade
Meaning: (of a situation or event) provide a sound reason for (someone) to do something.
Example: “the cost of the manor’s restoration persuaded them to take in guests”
Synonyms: Cause, Move
8) Embark
Meaning: Begin (a course of action).
Example: “she embarked on a new career”
Synonyms: Begin, Start
9) Relied
Meaning: Depend on with full trust or confidence.
Example: “I know I can rely on your discretion”
Synonyms: Depend, Count
Antonyms: Distrust
10) Solely
Meaning: Not involving anyone or anything else; only.
Example: “he is solely responsible for any debts the company may incur”
Synonyms: Simply, Uniquely
11) Consensus
Meaning: A general agreement.
Example: “there is a growing consensus that the current regime has failed”
Synonyms: Agreement, Concord
Antonyms: Disagreement
12) Deadlock
Meaning: A situation, typically one involving opposing parties, in which no progress can be made.
Example: “an attempt to break the deadlock”
Synonyms: Stalemate, Impasse
13) Obligation
Meaning: The condition of being morally or legally bound to do something.
Example: “they are under no obligation to stick to the scheme”
Synonyms: Duty, Agreement
14) Come up with
Meaning: Produce (something), especially when pressured or challenged.
Example: “he keeps coming up with all kinds of lame excuses”
Synonyms: Produce, Propose
15) Unintended
Meaning: Not planned or meant.
Example: “the unintended consequences of people’s actions”
16) Compelled
Meaning: Force or oblige (someone) to do something.
Example: “a sense of duty compelled Harry to answer her questions”
Synonyms: Force, Pressure
17) Arbitrary
Meaning: Based on random choice or personal whim, rather than any reason or system.
Example: “an arbitrary decision”
Synonyms: Random, Chance
Antonyms: Rational, Reasoned
