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Q72 (IAS/2019) Economy › Economy Current Affairs › Banking sector reforms Official Key

What was the purpose of Inter-Creditor Agreement signed by Indian banks and financial institutions recently?

Result
Your answer: —  ·  Correct: D
Explanation

The correct answer is option D. 24 banks signed an Inter-Creditor Agreement (ICA) covering stressed accounts aggregating ₹3.10 lakh crore in the ₹50-500-crore category, with the ICA serving as a platform for banks and financial institutions to come together and take joint and concerted action towards resolution of stressed accounts, which have received loans and financial assistance under consortium lending/multiple banking arrangements[1]. The signing of the Intercreditor Agreement by banks in India is an important step by leading lenders in India to combat the rising menace of non-performing assets (NPAs)[2]. CDR is a non-statutory mechanism which is a voluntary system based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA), with the ICA providing the legal basis to the CDR mechanism[3]. The other options are incorrect as the ICA was specifically designed for faster resolution of stressed assets under consortium lending arrangements, not for fiscal deficit management, infrastructure support, or acting as a loan regulator.

Sources
  1. [1] https://www.thehindubusinessline.com/money-and-banking/banks-fis-come-together-for-faster-resolution-of-stressed-accounts/article24497398.ece
  2. [3] https://fidcindia.org.in/wp-content/uploads/2023/10/RBI-MASTER-DIRECTION-NBFC-19-10-2023.pdf
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PROVENANCE & STUDY PATTERN
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Don’t just practise – reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.
Q. What was the purpose of Inter-Creditor Agreement signed by Indian banks and financial institutions recently? [A] To lessen the Governmen…
At a glance
Origin: Mostly Current Affairs Fairness: Low / Borderline fairness Books / CA: 0/10 · 10/10
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Statement 1
Did the Inter-Creditor Agreement signed by Indian banks and financial institutions aim to lessen the Government of India's fiscal deficit and current account deficit?
Origin: Web / Current Affairs Fairness: CA heavy Web-answerable

Web source
Presence: 4/5
"The ICA will serve as a platform for banks and financial institutions to come together and take joint and concerted action towards resolution of stressed accounts"
Why this source?
  • Explicitly states the ICA’s purpose: to enable banks and financial institutions to take joint action for resolution of stressed accounts.
  • This links the ICA to addressing stressed loans/NPAs rather than to government fiscal or current account targets.
  • Passage contains no language tying the ICA to reducing the Government of India’s fiscal deficit or current account deficit.
Web source
Presence: 4/5
"The signing of the Intercreditor Agreement by banks in India is an important step by leading lenders in India to combat the rising menace of non-performing assets (NPAs)"
Why this source?
  • Describes the ICA as a step to combat non-performing assets (NPAs) and resolve stressed assets.
  • Reinforces that the ICA’s objective is bank/creditor-focused asset resolution, not macro fiscal or external account adjustment.
  • No mention in the passage of fiscal deficit or current account deficit as ICA aims.
Web source
Presence: 4/5
"CDR is a non-statutory mechanism which is a voluntary system based on Debtor- Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA). The Debtor-Creditor Agreement (DCA) and the Inter-Creditor Agreement (ICA) shall provide the legal basis to the CDR mechanism."
Why this source?
  • Explains the ICA provides the legal basis for the Corporate Debt Restructuring (CDR) mechanism.
  • Positions the ICA within debt-restructuring/resolution frameworks rather than as an instrument to reduce government fiscal or current account deficits.
  • Supports the view that ICA’s focus is creditor-debtor resolution, not government deficit management.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 8: Financial Market > 2020 > p. 247
Strength: 4/5
“What was the purpose of Inter-Creditor Agreement signed by Indian Banks and Financial Institutions recently? • (a) To lessen the Government of India's perennial burden of fiscal deficit and current account deficit. • (b) To support the infrastructure projects of Central and State Governments. • (c) To act as independent regulator in case of applications for loans of \overline{50} crore or more The Reserve Bank of India's recent directives relating to 'Storage of Payment System Data', popularly known as data diktat, command the payment system providers that: • They shall ensure that entire data relating to payment systems operated by them are stored in a system only in India. • They shall endure that the systems are owned and operated by Public Sector Enterprises. • They shall submit the consolidated system audit report to the Comptroller and Auditor General of India by the end of the calendar year.”
Why relevant

This snippet lists 'To lessen the Government of India's perennial burden of fiscal deficit and current account deficit' as one of the stated options for the purpose of the Inter-Creditor Agreement, showing the idea has been proposed as a possible purpose.

How to extend

A student could treat this as a candidate purpose and check contemporary policy documents or press releases to see which option was actually adopted or emphasised.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 3: Money and Banking - Part II > 3.1 History of Indian Banking and Reforms > p. 126
Strength: 4/5
“The policies that were supposed to promote a more equal distribution of funds, also lead to inefficiencies in the Indian banking system. India's banking system until 1991 was an integral part of the government's spending policy. Through the directed credit rules and the statutory pre-emptions, it was a captive source of funds for the fiscal deficit and the key industries. Through the CRR and the SLR, more than 50% of the savings had either to be deposited with the RBI or used to buy government security. Of the remaining savings, 40% had to be directed to priority sectors that were defined by the government.”
Why relevant

Explains that historically India's banking system was 'a captive source of funds for the fiscal deficit' via directed credit and pre-emptions, indicating links between banks' lending behaviour and the government's fiscal position.

How to extend

One could infer that agreements among creditors might affect how bank funds are allocated and thus could indirectly influence fiscal financing, then verify via data on bank holdings of government paper before/after the ICA.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > DEFICIT FINANCING > p. 113
Strength: 4/5
“Deficit financing is defined as financing the budgetary deficit through public loans and creation of new money. Deficit financing in India means the expenditure which is in excess of current revenue and public borrowing. The Government may cover the deficit in the following ways: • By running down its accumulated cash reserves from RBI • 2. By issuing new currency itself • 3. By borrowing from the RBI and RBI giving the loans to the Government by printing more currency notes”
Why relevant

Defines deficit financing and lists mechanisms (including borrowing from the RBI) showing how government deficits are financed, highlighting the broader fiscal context in which banks and financial institutions operate.

How to extend

A student could combine this with knowledge of who finances government deficits (banks, markets, RBI) to assess whether an inter‑creditor agreement among banks plausibly targets those fiscal financing channels.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > 4.9 Monetization of Deficit and Deficit Financing > p. 164
Strength: 3/5
“Before 1997, Govt. of India used to finance its deficit directly from RBI by issuing ad hoc Treasury Bills to RBI. So, Govt. used to issue bonds to RBI, which in return used to print currency and gives it to Govt., which used to create a debt on Govt. of India. This is called (direct) monetization of deficit from RBI and it's a primary market transaction between Govt. and RBI. But this practice was stopped in 1997 by signing a historic agreement between Govt. of India and RBI and a scheme of 'Ways and Means Advance' (WMA) was started wherein govt. can take advances to accommodate temporary mismatches in the government's receipts and payments.”
Why relevant

Describes historical reforms that changed how government deficit is financed (ending direct RBI monetisation), pointing to policy mechanisms used to manage fiscal deficits.

How to extend

Use this to check whether the ICA aligns with other fiscal-management tools (like WMA limits) or addresses bank behaviour that affects government financing needs.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 3: Money and Banking - Part II > The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act 2002 (SARFAESI Act 2002) > p. 136
Strength: 3/5
“Earlier, the banks and financial institutions in India did not have power to take possession of securities and sell them in case of a loan default (rather they had to enforce their security interests through the court process, which was extremely time consuming). This had resulted in slow pace of recovery of defaulting loans and mounting levels of nonperforming assets of banks and financial institutions. Narasimham Committee I and II constituted by the Central Government for the purpose of examining banking sector reforms had considered the need for changes in the legal system in respect of these areas. These Committees, inter alia, suggested enactment of a new legislation for securitisation and empowering banks and financial institutions to take possession of the securities and to sell them without the intervention of the court.”
Why relevant

Discusses legal/policy measures (SARFAESI) aimed at improving banks' recovery of bad loans, implying creditor-side reforms tend to focus on loan recovery and NPA resolution rather than direct fiscal deficit reduction.

How to extend

A student could use this pattern (creditor reforms targeting NPAs) to hypothesise that the ICA likely aimed at creditor coordination for loan resolution and then compare ICA text or announcements to see if fiscal-deficit reduction was a primary aim.

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Statement analysis

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Statement analysis

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