Corporate Debt Restructuring

March 31, 20141

The Genesis

Need for evolving a mechanism for addressing stress on bank assets due to external reasons in the economy and also some internal reasons

Need for a formal, transparent & structured approach in a multi-lender environment

Need to preserve stakeholder value2

ObjectivesProvide timely and transparent mechanism to

restructure corporate debts of viable entities. Minimize losses to Banks and other interested

parties on account of avoidable company failures.Pre-empt companies being put to unnecessary

liquidationPrevent failure on the part of Banks to restructure

for want of agreement among themselves.

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The Evolution

CDR mechanism put in place by RBI in August 2001Eligibility: Corporates with exposure of Rs.20 crore and

above.Standard & Substandard accounts eligible.Willful defaulters and cases of misfeasance not

eligible. Secured creditors with minimum 20% share in either

WC or TL can refer a case to CDR.75% of secured creditors by value agreeing to

restructuring will be binding on the rest.

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February 2003 – High Level Group – Mr Kamesan

Doubtful accounts can also be restructured.Two Categories of borrowers: Category I (Standard & Substandard A/cs) and Category II (Doubtful A/cs).Viability bench marks suggested.Decision of CDR EG is final.Exit option built in.Provision of additional finance.

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November 2005 – Special Group – Mrs Shyamala Gopinath

Reduction of eligibility to outstanding exposure of Rs.10 crore.Support of 60% of creditors by number in addition to 75% by

value.Discretion to Core Group for dealing with wilful defaulters in

cases not involving frauds or diversion of funds with malafide intentions.

Regulatory concession in asset classification based on certain criteria.

OTS as a part of CDR mechanism.Limiting RBI’s role to guidelines.

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RBI Circular of Aug 27, 2008 superseding all earlier guidelines

Non–statutory mechanism based on ICA & DCA with “Stand still” clause and penal provisions built in.

Viability should be determined by banks – parameters included ROCE, DSCR, Gap in IRR & Cost of funds, Sacrifice.

Special Regulatory Treatment – Pre-conditions for restoration of asset classification and up-gradation on satisfactory performance.

Conversion of principal into debt instruments / equityDecision on the basis of super majority, binding on others.Sharing of additional finance - priority in recovery.‘Holding on operations’ and OTS / NS as part of restructuring.

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Mahapatra Committee – May 2013

Asset Classification - Impaired asset classification for all cases of restructuring effective from April 1, 2015 and for 2nd restructuring cases immediately.

Existing relaxations in asset classification for DCCO to continue in case of project loans.

Enhanced Provisioning requirement for standard restructured assets from 2% to 5% in a phased manner.

Tightening of viability criterion- 5 years for non infra and 8 years for infra (reduced from 8 years and 10 years)

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Mahapatra Committee – May 2013 (contd.)

Promoter contribution to be 20% of lenders sacrifice or 2% of restructured debt which ever is higher, as against 15% of lender sacrifice.

Personal guarantee of promoters made mandatory .

Recompense made mandatory in non-CDR cases too. Limited flexibility given for recovery of recompense

Cap of 10% on debt to equity swap. Permitted only for listed companies.

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Framework for revitalizing distressed assets – January 2014

Creation of three sub-categories of Special Mention Accounts – SMA 0 (incipient stress) , SMA 1 ( overdue 31 to 60 days) & SMA 2 ( overdue 61 – 90 days).

Reporting SMA accounts with aggregate exposure of Rs.5 crore and above to CRILC.

Mandatory JLF for resolution in case of SMA 2 accounts with aggregate exposure of Rs 100 crore and above.

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Framework for revitalizing distressed assets – January 2014 (contd.)

Independent Evaluation Committee in case of CDR restructuring beyond Rs 500 crore.

New category – Non Co-operative Borrowers.

Accelerated provisioning trigger for non compliance / non-adherence by lenders.

CDR STANDING FORUM & CORE GROUP General Body of all members represented by their Chairperson.

Self empowered body to lay down policies and guidelines.

Can review individual decisions of the CDR Empowered Group

The Forum to meet once in six months

CDR Core Group carved out of the Forum comprising Chairperson of IDBI, ICICI, SBI, PNB, BOB and BOI.

CDR Core Group takes policy related decisions on behalf of the Forum.

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CDR Empowered Group (EG)

EG to consist of ED level representative of IDBI, ICICI and SBI as standing members, in addition to all other members

Representative should have general authorization by the Boards of the participating FIs / Banks to take decisions regarding restructuring

EG to decide on restructuring of individual cases within a time frame of 90 days or maximum 180 days with the approval of Core Group

The decision of EG shall be final13

CDR Cell Comprising officials on deputation from Core Group member Banks.

Other Supporting staff outsourced.

To assist the Forum and the Group in all their functions.

All references for restructuring are made to CDR Cell.

Initial scrutiny of proposals received to decide whether the proposal is prima facie viable

Scrutiny of Final package to ensure adherence to RBI/CDR guidelines.

Issuance of LOA and any other directions given by CDR EG.

Monitoring overall progress in respect of sanctioned cases.

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Admission CriterionLoan assets with an aggregate debt outstanding of Rs 10 crore and above and involving at least two lenders.

The case may be referred by any lender with exposure of minimum 20% by value. A corporate can also refer its case with letter of support from a lender or lenders with exposure of 20% by value.

Cases of fraud and misfeasance are ineligible.

Cases of willful default may be considered if permitted by Core Group depending on case specifics.

BIFR cases are eligible subject to approval of Core Group and with certain additional conditions.

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