Three seminars on Corporate Debt Restructuring (CDR) mechanism were organized by the Indian Banks' Association & CDR Cell, IDBI in which eminent personalities viz.CMDs, EDs, Members on the Board of Directors from the Banks and Financial Institutions in the country were present.
The The seminars were inaugurated by Shri S S Kohli,CMD, Punjab National Bank at New Delhi, Shri O N Singh, CMD, Allahabad Bank at Kolkata and Shri R V Shastri, Dy.Chairman, IBA and CMD,Canara Bank at Bangalore. Shri M R Umarji, Chief Advisor(Legal) of the IBA welcomed the guests at the seminar at Kolkata while Shri Michael Bastian, CMD, Syndicate Bank delivered Welcome Address and Opening Remarks at Bangalore. In their Key-Note Addresses, all CMDs deliberated upon the background and development of the CDR mechanism in the country since its inception. They further stressed on timely implementation of the approved CDR packages and need on timely implementation of the approved CDR packages and need for further modification in the mechanism to add to its efficacies. Shri J N Godbole,ED, IDBI, Shri Siby Antony, CGM,CDR Cell, IDBI and Shri A L Bongirwar, DGM, CDR Cell, IDBI dwelt upon in detail about the background , objectives and the process & framework of CDR and the need to strengthen the same further.
While speaking at Delhi, Shri Rajendra Kakker,MD and CEO, Asset Reconstruction Company (I) Ltd.(ARCIL) and at Kolkata, Shri S Khasnobis , President & CEO,ARCIL, amply clarified the present scenario of Bank restructuring and the role of Asset Reconstruction Companies (ARCs) in the context of new legal framework and policies. They further mentioned that the Govt of India had proactively paved the way for creation and empowerment of ARCs through enactment of SARFAESI Act, 2002 (presentation available on IBA's website)
Shri M R Umarji, Chief Advisor(Legal),IBA made a presentation (available on IBA's website)on Securitisation Act and Re-construction of Financial assets & Enforcement of Security Interest Act,2002 at a seminar at Bangalore.
The CDR mechanism covers impaired corporate debt cases involving multi-banks with aggregate principal exposure of Rs.20 crore or more. Since introduction of the CDR mechanism in India, 127 cases have been referred to the CDR out of which 82 cases have been approved for restructuring with overall exposure of about Rs.62000 crore from Indian financial system. Restructuring packages in the respect of 42 cases have been fully implemented with aggregate debt of Rs.36600 crore.
Following a lively interactive sessions at the end, Shri V P Sharma,OSD,Delhi Local Chapter,IBA, Shri Prabir Moulik, Hon. Secretary, Kolkata Local Chapter, IBA and GM,Allahabad Bank and Shri M S Nayak, Hon.Secretary, Bangalore Local Chapter, IBA and GM,Canara Bank proposed Vote of Thanks to all present in these seminars.
Key-Note Address by Shri R V Shastri, Dy.Chairman, IBA and CMD, Canara Bank
Bangalore June 12, 2004.
RECENT DEVELOPMENTS IN BANKING
Some Issues in Corporate Debt Restructuring
It's my pleasure to address you at the fourth seminar on the Corporate Debt Restructuring (CDR) mechanism. As we are aware, IBA has all along enacted an important role in banks' functioning and I reckon, organizing this series is yet another novel initiative it has taken, that too on a very topical issue like corporate debt restructuring. I thank Mr. Sinor and all others concerned for giving me an opportunity to share some of my views at the commencement of this Seminar. This is an important forum comprising Chief Executives of banks and Directors on banks' Boards. This Forum also features experts in the field of corporate debt restructuring who will surely enlighten us with the present scenario, the future outlook and the means to resolve the existing issues. Therefore, my address will be, by and large, in the form of an overview of the shape of banking over the years while I also propose to briefly touch upon some key issues related to the CDR.
As this distinguished house is aware, an efficient financial system acts as an active alley to the macroeconomic growth process. As such, financial sector reforms occupied a place of pre-eminence while we started economic reform measures in the early nineties. Within the financial system, by virtue of its sheer dominance, banking system was accorded major thrust in the form of radical reforms. There is no gainsaying the fact that the banking system has historically remained at the center stage of major policy initiatives drawn up for the financial system. The reasons are not far to seek.
NATIONALIZATION
One can probably start with the phase of nationalization when the banks were accorded the role of occupying commanding heights in the overall development of the macro economy. Their role was not only to catalyze economic growth, but also to eliminate the regional disparities in growth as well as development at micro levels. It is to the credit of the banking system and of the policy makers and the regulators that our banking sector emerged as one of the most robust during the post-nationalization period. The robustness attained, in the form of branch and business expansion, is perhaps unparalleled in the financial systems the world over. Significant areas wherein banks were quite active following their nationalization include the following:
Text of keynote address at CDR Seminar organized by IBA
at Bangalore on June12,2004
Ø Effective liability-asset transformation.
Ø Balanced economic growth
Ø Compliance with mandated norms for designated sectors
Ø Viable terms of credit for deserving and potent segments
Ø Furtherance of higher education
Ø Significant role in furthering rural development.
Ø Greater role in core sector financing.
These are some of the major areas wherein banks have made their presence felt in a significant manner. If in the first phase of social control the assigned role of commanding heights drew the most out of banks, there has been a discernible shift in banks' approach to the process of nation building and for the economy to attain higher growth in the subsequent periods. It is to the banks' credit that they have found the mandated segments as profitable propositions in the present day context and are even reinvigorating their operations in the designated priority segments. One must admit in this context that the increasing role of banks in the overall economic milieu would not have been possible without financial sector liberalization juxtaposed with reforms in the real sector.
The next important landmark in the banking history came about in the late eighties when the first symptoms of fatigue in the banking system were quite apparent. Despite commendable progress in banks' geographical spread and functional reach, there was serious erosion in their productivity, efficiency and profitability which caught the attention of policy makers and thus, Narasimham Committee came to the fore.
BANKING REFORMS
Narasimham Committee- I made a host of path breaking suggestions aimed at improving the productivity, profitability and efficiency of the banking system on the one hand, and providing it with greater operational flexibility and functional autonomy, on the other. It covered several policy aspects including deregulation, accounting practices, institutional and structural issues and matters related to organizational development. Many of these issues constituted what was referred to as the first phase of banking reforms wherein one could see prudential norms being aligned with global benchmarks, dilution in government's stake in banks' capital, almost complete deregulation of interest rates and greater transparency in banking operations.
Contrary to apprehensions in certain quarters, first phase of reforms was quite rewarding for the banking system as a whole, notwithstanding the initial setbacks to few of the inherently weaker banks. This is because unlike in many other countries, liberalization of banking sector in India was initiated simultaneously with liberalization of the real sector and led the latter in terms of the extent of reforms. The gradual nature of reforms as opposed to big bang reforms also provided greater resilience to the banking sector in withstanding momentary aberrations. Almost all the public sector banks are now progressively inching towards global bench marks in terms of profitability, efficiency, strengthening of capital, diversification and proactive measures for sustaining the momentum in business and profit growth. Concomitantly, liberalization in no way has diluted banks' role in the national priorities and their activities in the designated socio-economic segments.
While the adjustment process related to the first phase of banking reforms turned out to be broadly in tune with the objectives, it was desired that the gains of the first phase need to be consolidated, with simultaneous reassessment of some of the structural and systemic issues. Broadly, the second generation reforms focussed on three broad and inter-related issues:
Ø Strengthening the foundations of the banking system
Ø Streamlining procedures, upgrading IT & HRD systems
Ø Restructuring the banking system
Strengthening the Banking System
Strengthening the foundations of the banking system is at present the core principle of banking reforms. The central plank is a set of prudential norms that are aimed at imparting strength to the banking system, with induction of greater accountability and market discipline. These norms not only include capital adequacy, asset classification and provisioning, but also accounting standards, exposure and disclosure norms, and guidelines for investment, risk management and asset liability management. The basic approach of the regulators, quite justifiably, has been to benchmark these norms against international standards. Basel II Accord, which outlines many such benchmarks, is likely to take effect in 2006, and we are now in the midst of in-depth deliberations as to the outlook and requisite strategic shifts for migrating to the Basel II framework. Cleaning of the loan book and prevention of slippage have been major concerns of the banks before there is complete switchover to Basel II. Risk management is a relevant area wherein many banks have made considerable headway, of late, in terms of having dedicated outfits and putting in place a comprehensive risk management mechanism. Risk profiling of overall operating environment, various segments and loan accounts is probably drawing the maximum attention of banks which are progressive and which understand the dynamics of thriving in a globally competitive system.
The 90-day norm for loan classification has already come into effect from the last quarter and it is a pleasant augury that the Indian banks are geared up to comply with such international best practices. As regards the NPA problems, a series of initiatives have been taken to set right the loan books and prevent further erosion in the banks' margins. Effective assessment, prevention, recovery and provisioning are what constitute a 'Menu' approach to sort out the NPA problems.
This seminar deals with the fourth aspect of the 'Menu' which is probably the most significant means to avoid further impairment in banks' loan book. Corporate Debt Restructuring, though of recent origin, surely promises to stem the potentially impaired assets of the banks to a major extent. Typically, 'a stitch in time, saves nine' concept that has been banks' overarching objective, of late. Other noteworthy developments in this regard can be found in the Settlement Advisory Committees, Asset Reconstruction Companies and the passage of the SARFAESI Act which have rekindled the hopes for the banking system to take on the NPA menace and the rigours of the stiffer prudential norms effectively.
Transparency & Market Discipline
Second phase of banking reforms also features 'high quality financial reporting' as the corner stone of market discipline and transparency - highly essential for the efficiency and stability of the banking system and a prerequisite (pillar III) under the Basel II framework. Information asymmetry has emerged as a major flaw in the banking system and the same needs to be addressed in the right earnest. Globalization has brought stringent quality criteria as the emphasis is now on comparability of information. Information is probably the most difficult area in the context of banking reforms, with the key challenge being as to how the gap between accounting valuation and economic valuation can be brought down further. This again brings out the significance of risk management mechanism in banks.
Bank Restructuring
Structural transformation has been another interesting yet intriguing facet of reforms in our banking system. Major factors for strategic focus on structural change broadly emanate from technological innovation, deregulation of financial services, external financial liberalization and organizational overhauling in leading financial entities of the world. There has been a strong drive recently towards structural consolidation for exploiting the core competitiveness and for developing niche strategies. However, in the Indian case, structural changes are yet to take strong roots and are yet to be in tune with what the Narasimham Committee envisaged. Mergers and acquisitions have been sparingly resorted to. Market driven and synergy based M&A are yet to be employed fully. But it appears to be a matter of time when such activities become absolute necessities, especially in the medium term. Banking system has also seen progressive move towards universal banking which is likely to blur the distinction between the banks and the DFIs further. At the moment, reverse merger has emerged as one of the most preferred modes of structural consolidation, calling for fresh initiatives from banks, especially in relation to long term resources.
Overall, one could probably conclude that the implementation of the reform agenda has, by and large, seen remarkable success in the banking system as a whole. This is evident from the banks' stronger bottom line, their technological advancements, their ability to integrate better with the market forces and commitment towards enhanced value for stakeholders. This also finds corroborative evidence from international rating agencies who have upgraded the performance of Indian banks recently under key parameters. Yet there is a fair distance to traverse, especially when one looks at the quality of lending vis-à-vis the volumes and with regard to the compulsions one could face in a completely integrated and globally operative banking system.
Given this backdrop, there can be hardly two opinion about the relevance of corporate debt restructuring in banks.
CORPORATE DEBT RESTRUCTURING (CDR): SOME ISSUES
CDR mechanism became operational in India from March 2002 when the Inter-Creditor Agreement (ICA) was signed on February 25, 2002, involving 47 institutions/banks. A novel concept, CDR started off to facilitate a timely and transparent mechanism for restructuring of corporate debts outside the purview of BIFR, DRT and other legal proceedings. Although originally intended to cover sub-standard debts, CDR's scope was widened in February 2003 to include doubtful and BIFR cases and even standard loan assets, excluding willful defaulters.
The evolution of CDR was basically two-pronged - through the bottom-up factors and the top-down developments over the years. The bottom-up or micro level factors mainly concern the mounting NPA levels in the banks and more so, with reference to the likelihood of further slippage of assets. These problems are sought to be addressed through streamlining of systems and procedures, an effective review mechanism and recourse to IT-backed risk management mechanism. Banks, in the mean time, have considerably toned up their credit administration systems and many of the banks have taken proactive measures by keeping special watch over potential problem accounts.
Of the top down factors, which are basically macroeconomic in nature, there has been considerable volatility in frequency and nature of business cycles, especially during the years preceding 2003-04. Few of the core sectors, including the capital goods segments, featured prolonged recession which severely affected cash flow in banks and eroded their margins. It is to the banks' credit that they could effect significant decline in their expenditure which could partially offset the revenue loss from many such accounts. Poor cash generation, as you all know, also entails attendant problems like accretion of fresh NPAs and the strains associated with higher provisioning requirements.
It is in this backdrop that CDR has come to play a prominent role as Indian banking majors prepare to go global and the banking system strives to be compliant with the global benchmarks and improve its bottom line on a sustained basis. As we all know, NPAs perhaps pose the most daunting challenge to the banking system today and it is the quality of loan books, among others, which will distinguish the leaders from the laggards in the future banking scenario.
Going by the provisional position as at March 2004, a total of 127 cases have been considered under CDR out of which 82 proposals have been approved involving exposure in excess of Rs.60,000 crore. CDR packages for 42 companies have been fully implemented with debts involved to the tune of Rs.36,587 crore. There is every reason to believe that though this is a modest beginning, CDR mechanism will go a long way to provide safety net for SCBs' advances, estimated currently at about Rs.8,56,000 crore. The need to make the most of CDR is also on account of greater exposure of the banks to sensitive segments, higher finances under consortium arrangements and increasing foray of banks into the infrastructure segments.
I am sure this seminar will open up new vistas for a time bound action plan in the matter of completely building in CDR into the asset valuations and realizing the full potential from the loan accounts. Like in the earlier editions of this series, this seminar, I am sure, will feature specialists who can provide deeper insight into such a leading issue. The presence of bank directors is also a positive aspect of this series as we strive hard to induce greater professionalism and accountability to banks' management and governance mechanism.
I would like to add one personal observation before I conclude my address. If first generation of banking reforms was about the process of transition, the current phase is all about complete transformation of the banking system. This transformation will not take the fullest effect unless banks themselves take fully proactive measures as dictated by a regime of effective self-regulation. Until recently, regulatory bodies like RBI or IBA have provided adequate and effective guidance to banks in taking on the existing as well as potential problems. When there are progressive moves towards autonomy and functional freedom, only banks have to call the shots first at the earliest signals of a problem. This is in no way to discount the role of regulation which in any case would be mostly a post-event exercise, especially with regard to gauze the movements in the economic value of assets.
I wish this Seminar success and hope that the interactions will lead to concrete and meaningful action points.
Thank you.
Select Questions Answered in Previous Seminars on CDR Mechanism
1. Why not have period of settlement restructured to optimum level to ensure that it does not affect bank's profitability?
Estimates of future profitability are prepared jointly by the referring lender and the borrowers in conjunction with CDR Cell. In complicated cases, specially in large projects, lenders team (monitoring team) including both term as also working capital lenders work out the restructuring package. Whenever required help of external reputed agency in the field is also sought for establishing techno-economic viability and sustainable level of cash flow. The emphasis is to compare the projections with past performance of prominent players/industry averages particularly performance parameters like capacity utilization, EBIDTA, break-even point, unit cost of production, unit realization, etc. The repayment/settlement period is linked with available cash flow worked out on realistic basis as above. The efforts are made to keep the repayment period between 7 & 10 years. In some cases packages are drawn with different buckets to facilitate early exit to suit the requirements of lenders who desire to exit albeit with some more sacrifices vis-à-vis lenders who are ready to stay along. While the settlement period may be seemingly high, it is important to note that the interest rates are at PLR or above PLR to ensure no loss to the lenders although may mean reduced profit. Further, safeguards/stipulations like, Trust & Retention Account to trap all the cash flows, acceleration in repayment clause and disincentive like conversion of part of loan into equity for outstanding beyond 7 years, etc., are being incorporated. The conversion option also enable sharing of upside with the company. Further, to take care of issues of banks with RBI regarding 5% limit for investments in share, CDR has had discussion with RBI and RBI has informed that whenever request is being made by Bank generally immediate approvals are being granted.
2. What is the Treatment of Devolved LC Outstanding and why are they converted in WCTL rather than treating on par with working capital?
Generally devolved LCs form part of the fund based irregularity of the banks on the cut off date and the same is required to be converted into WCTL as part of the package. However, some banks do not combine them with CC irregularity and try and recover from regular operations. This would affect the cash flow considerably and in turn, operations of the company especially when
the company has to ramp up production post restructuring. The issue of the quantum of working capital irregularity is normally decided at the consortium meeting of working capital banks and the treatment given in the package is based on the suggestion by the lead consortium banks. The objective of the CDR mechanism is to facilitate viable operation of the corporates, for which adequate working capital is required to be ensured by the working capital banks. Treatment of devolved working capital may depend on the position of working capital availability. The debt restructuring would be meaningless without making available adequate working capital for the company to operate at viable levels specially when safety aspect of additional funds/WCTL has been taken care through charge on fixed asset and other conditions mentioned above.
3. Why does restructuring package not involve funding by FI's especially if short term funds are diverted for long term uses?
The phenomenon of diversion of short-term funds to long term is also applicable in reverse way in some cases. This aspect was discussed in the Core Group and it was felt that in case of additional financing short term needs may be financed by working capital lenders and long term requirements be financed by terms lenders. However, there have been cases where the additional financing requirements in the CDR for meeting capital expenditure and cash losses etc. has been pro-rata shared by FIs and Banks. Further, WCTL and FITL in all CDR cases are secured by pari-passu charge on fixed assets to enable banks to restore the CC limits.
4. What is the security available for WCTL?
All CDR cases term lenders are required to cede pari-passu charge on fixed assets for securing WCTL/FITL in favour of working capital bankers. In fact, it is CDR which gives NOC on behalf of term lenders to expedite the process of creation of security. However, since the irregular portion of the working capital would be fully secured by additional security, working capital bankers would be required to release fresh need based limits after carving out WCTL to eliminate shortage of working capital/cash credit.
5. In case FITL is already collected by banks after cut off date, is it to be refunded in package and why?
CDR works on the principle of give and take and therefore, FI/ Bank having stronger position in one case may be on the weaker ground in other case.
Resolution of the inter creditor issues with a view to bringing them on par is one the main objectives of CDR restructuring. It is towards this that FITL collected by a few lenders after the cut off date in CDR packages is required to be adjusted either by way of refund, priority payment to other lenders to bring them at par or combination thereof based on general consensus and with super majority. While the objective is to have equitable justice, attempts would be made to minimize such instances.
6. What is the position about Willful Defaulter cases under CDR?
A sub-committee of executives at the level of ED appointed by the CDR Core Group has already examined the suggestions. The recommendations by Core Group have been forwarded to RBI and its response in the matter is awaited. However, the process of declaring a borrower as willful defaulter has been made more streamlined by RBI and a clarification on the process has been incorporated in the Credit Policy announced recently (May 18, 2004). With these measures, it is expected that the instances of declaring borrowers as willful defaulters by minority lenders would be far and few in future.
7. Is there a possibility of OTS for lenders with small exposure?
As per the CDR scheme, exit option is available to minority lenders in terms of clause 4.6 of RBI circular dated February 5, 2003. Further, different buckets with early exit options could be incorporated in the package to suit the requirement of those lenders who desire to exit from the account, with relatively higher sacrifices as compared to those who opt to be with the corporate for longer periods. The only difference with introduction of CDR revised circular, is that the responsibility for arranging to takeover its share now lies with the exiting lender rather than the borrower. A borrower whose performance has been stressed would always find it very difficult to mobilise additional funds on account of weak financial position.
8. Can banks refuse additional exposure?
The objective of restructuring under CDR mechanism is to preserve the viability of potentially viable corporates. Unless adequate working capital is made available, successful restructuring would not be possible. In order to give additional comfort to those lenders who extend working capital after carving out WCTL, term lenders cede pari-passu charge on fixed assets in respect of WCTL. It may also be mentioned that if additional assistance is envisaged in the restructuring package, providers of such additional assistance, existing or new would be eligible for preferential claim on the cash flow from operations. Incidentally, in terms of CDR scheme additional funding is optional in the case of doubtful assets.
9. Are there plans to reduce cut off under CDR?
Core Group has already decided that progressively the entry limit for eligibility under CDR may be reduced from Rs.20 crore to Rs.15 crore subject to approval of RBI. In the recent credit policy there is already indication that suitable scheme on CDR lines would be introduced for SME sector.
10. Is Right of Recompense available in CDR cases?
The country has seen very volatile interest rate market from 8% to 21% in last 10 years. It is true lender must have recompense for economic loss. Right of Recompense is stipulated invariably in all CDR cases, where large sacrifices are envisaged from the lenders. The quantum, nature and timing of recovery is being examined for the purpose of giving well defined formula to the borrower so that the clause does not remain open ended.
11. Should the sacrifices be written off?
In case of future sacrifices on account of reduction of interest, lenders have been working out economic sacrifices as per RBI guidelines. In view of reduction in PLR the quantum of such provisions, if any required also has been reduced. RBI has issued a circular to institutions based on which there are hardly any cases requiring provisioning. It is felt that term loans from banks also would be covered by the circular.
12. How the Interest of minority lenders are protected under CDR?
In terms of the RBI guidelines, if 75% of the lenders by value agreed to a restructuring packaging of an existing debt, the same would be binding on the remaining creditors. However, the CDR has been pursuing a philosophy of conciliation rather than confrontation and towards this all the lenders irrespective of the size of exposure are given opportunity to express their views and as far as possible their views are taken cognizance of while preparing the packages. In case any of the small lender(s) for any internal reason, group exposure, industry exposure is not able to fully abide by the CDR Empowered Group's decision on restructuring, exit option has been provided in the CDR scheme. It has also been decided by the Empowered Group that a representative of the minority lenders would be inducted in the Monitoring Committees that are being constituted for monitoring the implementation of the restructuring packages.
13. How interest rate revision is done in CDR packages and what is rationale?
The issue raised was that how the projects would become viable merely by reduction of interest rate. In this context, it may be appreciated that the interest rate contracted by many of the companies during mid 1990s was in the range of 17-20% p.a. and the interest cost as a percentage of total revenue in most of the stressed/NPA cases was observed to be in the range of 10-15%. This is primarily due to high debt gearing and high interest rates prevailing (on account of inability to raise funds from capital market) at the time of contracting the loans. The interest burden of this order is unsustainable in present competitive era. Since the interest rates have since softened to a level of about 10-12%, the attempt in the restructuring exercise has been to realign the interest rates to current market rates so that the total interest cost as a percentage of revenue is not more than to 5-7%. It is generally ensured in the package that there is no economic loss in such reduction. Further, every restructuring package incorporates a recompense clause
for the purpose of recouping the economic sacrifices made by the lenders in the event of the company's performance is better than the projections.
14. How are sacrifices on the part of agencies like Electricity Boards, Excise Dept, etc. ensured under CDR?
CDR mechanism was originally aimed at standard and sub-standard assets. It was extended to doubtful and BIFR cases in February 2003. Sacrifices on the part of agencies like SEBs, Customs Dept etc are normally required in respect of the latter category of assets. Since SEBs and similar other agencies are not part of CDR, the Core Group has laid down certain criteria which, interalia, preclude cases that would be viable only with concessions from above-mentioned agencies. It has been the endeavour of CDR to restructure only those cases whose viability is established without external reliefs and concessions.
15. Source of data for projections and how realistic are they?
Estimates of future profitability are normally prepared jointly by the referring institutions and the borrowers in conjunction with CDR Cell. The emphasis is to compare the projections with past performance; industry averages particularly performance parameters like capacity utilization, EBIDTA, break-even point, unit cost of production, unit realization, etc. to ensure realistic projections. An analysis of performance of corporates where packages have been fully implemented revealed that in most of the cases their performance was better than projections.
16. What is the concept of equivalent PLR? How the provisioning is made for future sacrifices on account of restructuring / reduction in long term rate of interest?
RBI vide circular no. DBS.FID No.10/01.02.00/2001-02 dated February 1, 2002 addressed to CEO's of all India FI's have advised that the 'equivalent of PLR as on the date of restructuring' would be the rate charged to a 'AAA' rated borrower, immediately preceding the date of restructuring, if such rate was different from the announced PLR and the original risk factor' would mean the risk factor applicable to the borrower at the time of initial sanction of the loan.
a) Discount the interest cash flows at (a) above at PLR or its equivalent (as on the date of restructuring) plus original risk factor, to arrive at present value of future interest.
b) Determine future interest on the balance period of the loan on the basis of the interest rate as restructured.
c) Discount the cash flows at (c) above at PLR or its equivalent (as on the date of restructuring) plus original risk factor to arrive at the present value of future interest cash flows.
d) The provisioning needed would be (b) minus (d)."
The economic sacrifices are worked out on above lines with respect to equivalent PLR. Since there has been considerable reduction in PLR and therefore, equivalent PLR it is generally observed that when interest rates are realigned pursuant to the present rates, the quantum of economic sacrifices is considerably less. FI's have been making provisioning corresponding to economic sacrifices only.
Banks may adopt the above procedure for their terms/ WCTL/ FITL which are long term in nature. In respect of working capital the interest rates are reviewed every year and provisioning can be made accordingly. The matter has been taken up with RBI for suitable clarifications to banks.
17. What kinds of industries are eligible under CDR?
The RBI circular defines that CDR is available for all corporate. Already
infrastructure projects are covered. This matter is taken up with RBI to clarify
about coverage for service industries, NBFC, export houses, trading, etc.
CDR PRESENTATION -
Welcome Address & Opening Remarks
by
Mr. Michael Bastian, CMD Syndicate Bank
Mr. Shastri, Chairman & Managing Director, Canara Bank and members on the board in the fraternal banks and Financial Institutions and distinguished guest speakers!
I am indeed privileged to welcome you to the city of gardens and to its salubrious climate. I am also delighted to welcome you to this seminar on CDR organized by IBA and IDBI.
Corporate debt re-structuring is a concept in vogue in managing corporate accounts, which exhibit incipient weakness due to various factors. CDR envisages a timely and transparent mechanism for re-structuring corporate debts. CDR mechanism is voluntary, and non-statutory and outside the purview of BIFR, DRT and other legal proceedings. Recognizing the increasing importance of a scheme like CDR in the scheme of managing potential weak assets, IBA and IDBI is organizing the series of seminars. The focus audience is the directors of the banks and financial institutions. The larger idea is to enlighten them on the salient features of the scheme and the importance of timely implementation of the packages.
Corporate Debt Restructuring as a remedial measure is to prevent incipient delinquency in corporate accounts. This scheme of restructuring is applicable only to standard and sub standard assets of the banks and financial institutions. Now doubtful debts are also included. There are other eligibility criteria to come under the purview of CDR, like the size of the assets, arrangement of finance etc all of which will be dealt in this seminar. The CDR system has been evolved on the lines of similar mechanism prevalent in UK, Korea, Thailand and Malaysia.
The scope of a system like CDR is:
1. To possibly prevent further impairment of assets of otherwise viable corporate accounts &
2. To facilitate nurturing of potential sick accounts.
The Debtor-Creditor agreement and the Inter-Creditor agreement provide the legal framework for CDR mechanism to operate. CDR mechanism has its merits.
First, under CDR there is an institutional mechanism for the Banks and financial institutions to take cognizance of the incipient weakness of the corporate account and compels them to take a fresh view of the loan proposals in terms of re-scheduling and re-pricing them.
The second important aspect is that the parties to the CDR own the decision. Being a voluntary and non statutory system to re-structure the corporate debt, the parties to the scheme, the banks, financial institutions and the promoters, after much deliberations arrive at certain decisions which are binding on them. They are the owners of the decision. It is they, who have to collectively take forward the decisions to the logical conclusion. Therefore, there is little scope for backtracking or the re-structured proposals to fail.
While it is gratifying to note that CDR has established a track record in re-structuring corporate debts, there are certain related issues that I would like to leave it to your consideration and deliberation.
The cost factor: The concept of nursing impaired accounts and preventing them slipping into a full NPA comes with an enormous cost. There is an element of sacrifice involved. But to what extent? Some of the recent proposals that are being considered for re-structuring require banks to forego incomes, which are causes of concern.
Perhaps, we may have to fine-tune the procedural and related mechanism so that CDR becomes an effective instrument in preventing loan delinquency. I would suggest a matrix system of alternatives to arrive at the best possible solution. Perhaps there is scope to have a system of benchmarks to guide the banks, institutions and the borrower to arrive at a balanced solution.
We need to re-align our judicial system and other institutions so that there is no premium on inefficiency. CDR mechanism should not become a fait accompli system to provide cover for inefficient and mismanaged corporate entities.
Credit risk has received extensive theoretical and empirical investigation. Available research on this topic has attempted to explain the issue of impaired loans on the basis of micro-economic variables. However, it is widely known that problem loans are caused by both macro (the general economic condition) as well micro economic factors (bank specific). If the banks and financial institutions could build sufficient data base and analytical reports about customers, projects and industry and share the valuable information amongst them within the ambit of law of the land, it will help in processing loan proposals in the correct and proper perspective.
Today, the constitution of the CDR Empowered Group is not representative and full fledged. The committee should be enlarged and balanced. Reluctant foreign and private sector banks should be persuaded to join CDR mechanism in their own interest.
Re-structuring of Corporate debt is no panacea to prevent accumulation of impaired accounts. Re-structuring exercise is generally complicated, as huge volume of data has to be factored-in, before arriving at a decision. Prevention is better than cure.
It will also help if banks widen their horizon and take a pragmatic approach in meeting the needs of the industries. The classic area where we need pay attention is the credit delivery systems that are in place now. In a typical bank lending in our country, the covenants and other agreements are so obtained to commit the borrower to various obligations. The Lenders Liability Act, in force, in United States casts certain obligations on the part of the banks as well. Such legislation in India will make CDR mechanism not just a prudent or expedient practice, but an obligation under the statue.
The emerging issues in the banking industries are many. The overall environment in the financial sector has fostered stability and provided a measure of protection to the existing institutions. We have also made progress in several areas. We have gained invaluable experience. What is needed is to institutionalize the various mechanisms that we have built over the years and the experience that we have gained. This is edification of CDR mechanism and posterity will be benefited by these exercises. I leave this thought with you for your consideration and wish you all success in your deliberations.
I once again welcome the dignitaries on the dais, the organizations - IBA, IDBI and all the participants.
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