The junior lender should consider meeting the contractual terms for the project in the event of a delay in payment from the borrower. In the event of such a situation, the junior lender should be aware that there are usually only two options: either to inject funds into the project, to remedy financial defaults under the senior lender, or to pay the priority lender. This last point is often almost impossible in cases where the priority lender has provided very large financing. The interbank agreement plays a central role in the right to pledge. It is therefore essential that both lenders establish a solid foundation for their rights and priorities in the event of a borrower`s financial capacity failure and late payment. In the absence of such a document, each party can make its own decisions and be inconsistent. The whole trial can be unethical and uneconomic and can quickly turn into a legal disorder in court. Typically, there are two creditors in an inter-creditor agreement – one senior and the other a secondary or junior lender. Company A, for example, receives a loan from Bank A for a large project. Subsequently, Company A also receives a relatively modest loan from Bank B for further development of the same project.
In this case, Bank A is the senior lender and Bank B is the junior lender. To ensure a rapid resolution of troubled assets, some 22 public sector banks (including India Post Payments Bank), 19 private lenders and 32 foreign banks signed the Inter-Creditor Agreement (ICA) on Monday to quickly monitor the resolution of stressed assets. Finance Minister Piyush Goyal called the move a “big step forward” in the fight against non-performing loans from the banking sector. The agreement was also signed by 12 major financial institutions such as LIC, HUDCO, among others. The agreement, as proposed by the Sunil Mehta Committee, aligned its procedures with all the immediate laws, rules and regulations of the country and the RBI. Such an agreement plays a decisive role in the right to collateral. Therefore, the agreement is important to all lenders, as it is the basis of rights and priorities if the borrower is not able to pay properly or be insolvent.