The slowdown in the economy after
2010-11 has had a ripple impact on the fortunes of India Inc. and lenders
alike. With gross domestic product (GDP) growth decelerating from 8.4 per cent
in 2010-11 to the sub-five per cent level in the first three quarters of the
current financial year, the number of companies
seeking succour from
lenders under the aegis of the corporate debt restructuring (CDR) cell had
almost doubled to 605 as of December 2013 against 305 as of March 2011.
Further, there has been a 194 per
cent jump, from []1,38,604 crore at the end of
March 2011 to []4,07,656 crore as of December 2013, in the amount of
loans that came up for recast.
Therefore, it is not surprising
that bank managements, in their internal meetings and conferences with the
media and analysts, are devoting as much time fielding questions on the loans
that had to be restructured in a quarter vis-à-vis loans that have gone sour.
Myriad problems
Many factors have forced
companies to approach banks for a loan recast. These include the slowdown in
domestic as well as global demand, volatility in input costs, adverse currency
movements, and projects getting stalled for want of statutory approvals such as
environment and forest clearance.
Other reasons include diversion
of funds into real estate, diversification into unrelated businesses, and too
much debt on their balance sheets.
Under CDR, lenders, among others,
make concessions to corporates by reducing interest rates, extending the
repayment schedule, providing additional funding, and converting debt into
equity/preference shares (to a limited extent).
The CDR cell is the banking
industry’s common platform for corporate debt restructuring. All references for
corporate debt restructuring by lenders/borrowers are made to this cell.
The CDR mechanism covers only
multiple banking accounts, syndication/consortium accounts, where all banks and
institutions together have an outstanding aggregate exposure of []10 crore and above.
Industry-wise classification
shows that the infrastructure sector topped the corporate debt restructuring
list, accounting for 19.63 per cent of the total quantum of debt ([]2,07,635 crore) being handled by the CDR cell
as of December 2013. The iron & steel sector was a close second with 17.92
percent.
Plugging loopholes
The economic downturn provided
the perfect pretext for some unscrupulous company
promoters to try and wangle concessions
from banks.
There have been cases where the
realization that a corporate is going down the chute prompted some bank chiefs,
especially from the public sector, to push it to the corporate debt
restructuring cell just so they could get a breather on the asset
classification front and save on provisioning.
In such cases, company promoters
have ‘gainfully’ utilized the time taken by the lead bank to conduct
techno-economic viability studies and stock audit to take a call on
accepting/rejecting the debt recast proposal to alienate (sell) the assets
pledged to banks.
The RBI has seen through this
game and prescribed tighter norms for reviving distressed assets. So has the
CDR cell.
The lead bank in a consortium of
lenders is now required to conduct an audit of how a company has utilized a
loan before processing its request for a debt recast.
According to Raj Kumar Bansal,
Chairman of the CDR cell, the lead bank in a consortium could also press for a
special audit wherever diversion of funds and fraud are suspected.
To ensure company promoters’
commitment to the debt recast package, the lenders now compulsorily take a
personal guarantee from promoters.
The CDR cell also requires
minimum promoter equity contribution in all cases to be either 25 percent
(against 20 percent prescribed by the RBI) of a lender’s sacrifice or 2 per
cent of the restructured debt.
The time given to a company whose
debt restructuring has been approved by the cell to turn around has been cut to
eight years (from 10 years) in the case of infrastructure companies and five
years (seven years) in the case of non-infrastructure
companies.
Banking on a rising tide
The stiff norms seem to have
slowed the flow of debt recast proposals. Overall, in the first 11 months of
the current financial year, the CDR cell received debt recast references with
respect to 91 companies (against 129 in the whole of the previous year),
aggregating about []1,22,500 crore ([]91,497 crore in 2012-13).
With few days to go for the
fiscal year to end, bankers expect the overall quantum references to the cell
to touch about []1.30 lakh crore in 2013-14. Until
the economy turns around, companies will keep knocking on the doors of the cell
for succour.
As a rising tide lifts all boats,
so, too, bankers hope an economic upturn will bring down the number of cases
referred to the CDR cell.
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