Corporate Debt Restructuring Mechanism

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<ul><li><p>8/10/2019 Corporate Debt Restructuring Mechanism</p><p> 1/3</p><p>Corporate Debt Restructuring (CDR) Mechanism in India:</p><p>Corporate Debt Restructuring (CDR) is a mechanism to revive doubtful corporate loans in order to</p><p>ensure safety of money lend by the banks and financial institutions through timely support by</p><p>restructuring the loans.</p><p>It is a voluntary non-statutory system based on Debtor-Creditor Agreement (DCA) and Inter-CreditorAgreement (ICA). CDR mechanism was evolved and detailed guidelines were issued by Reserve bank</p><p>of India in consent with government and financial institutions on August 23, 2001 for</p><p>implementation by financial institutions and banks. These guidelines on CDR were subsequently</p><p>reviewed and revised on the basis of recommendations of a High Level Group and current</p><p>comprehensive guidelines on CDR as well as non-CDR restructuring were issued in August 2008.</p><p>The main objectives under this mechanism are as follows:</p><p> To ensure timely and transparent mechanism for restructuring of corporate debts of viable</p><p>entities facing problems, for benefit of all concerned</p><p> To aim preserving viable corporates that is affected by the certain internal and external</p><p>factors To minimise losses to the creditors and stakeholders through an orderly and co-ordinated</p><p>restructuring program.</p><p>The restructuring of a companys outstanding obligations, habitually attained by:</p><p> Providing concessions in payment and waiving part of interest</p><p> By converting the un-serviced portions of interests into term loans through reduction in</p><p>margins</p><p> Reassessment of credit facilities including working capital</p><p> Restructuring the management</p><p> Reduction in equity capital to make more capital available for expansion</p><p> Conversion of debentures into equity to give relief on the compulsory payment of interest</p><p>on the debentures etc.</p><p>Trend Analysis: The thought to introduce CDR was to help sinking corporates if they fall under viable</p><p>category. However, in recent years CDR comes under scanner due to extraordinary rise in the</p><p>number and volume of advances being restructured under the scheme. Statistical trends for CDR are</p><p>as follows:</p><p>Table1: Trends in Restructuring:</p><p>Particulars Mar-09 Mar-10 Mar-11 Mar-12 CAGR (%)</p><p>Gross Advances (Rs. Crore) 27,53,365 32,27,287 39,82,954 46,55,271 19.13</p><p>Restructured Standard Advances</p><p>(Rs. Crore) 75,304 1,36,426 1,37,602 2,18,068 42.54</p><p>Ratio (%) 2.73 4.23 3.45 4.68</p><p>Source: RBI</p><p>Trend for restructuring shows that Gross advances and Restructured standard advances grew at a</p><p>healthy rate of 19.1 per cent and 42.54 per cent from Mar 09-Mar 12. Gross advance grew highest</p><p>during 2011 at 23.44 per cent y-o-y, while restructured standard advances grew highly in 2010 and</p><p>2012 by 81.17 per cent and 58.4 per cent respectively.</p></li><li><p>8/10/2019 Corporate Debt Restructuring Mechanism</p><p> 2/3</p><p>Table 2: Trends in Restructuring across Banks:</p><p>Particulars</p><p>2009-10 2010-11 2011-12</p><p>Gross</p><p>Advances</p><p>Restructured</p><p>Standard</p><p>Advances</p><p>Gross</p><p>Advances</p><p>Restructured</p><p>Standard</p><p>Advances</p><p>Gross</p><p>Advances</p><p>Restructured</p><p>Standard</p><p>AdvancesAll Banks 17.21 81.17 23.41 0.86 16.88 58.48</p><p>Public Sector</p><p>Banks19.81 96.59 22.98 3.86 16.02 58.33</p><p>Private Sector</p><p>Banks12.8 5.6 26.6 (-)28.48 20.65 67.35</p><p>Foreign Banks (-)1.38 (-)25.06 19.06 (-)27.56 16.35 (-)23.76</p><p>Source: RBI</p><p>Ratio of Restructured standard advances to gross advances (%) across Industries:</p><p>Source: RBI</p><p>If we see the exposure of banks towards restructuring, public banks are way ahead of private and</p><p>foreign banks which shows that large number of restructuring cases are handled by public banks.</p><p>During March 09 to March 12, Ratio (Standard advances to Gross advances) for banks grew at a</p><p>CAGR of 24 per cent while for private and foreign banks it was at (-10)per cent and (-33) per cent</p><p>respectively. This show that among all banks high risk of restructuring is associated mostly with</p><p>public banks.</p><p>Table 3: Trends in Restructuring across sectors:</p><p>Particulars 2009-10 2010-11 2011-12</p><p>Segments</p><p>Gross</p><p>Advances</p><p>Restructured</p><p>Standard</p><p>Advances</p><p>Gross</p><p>Advances</p><p>Restructured</p><p>Standard</p><p>Advances</p><p>Gross</p><p>Advances</p><p>Restructured</p><p>Standard</p><p>Advances</p><p>Agriculture 25.74 64.91 15.65 11.16 15.09 20.74</p><p>Industries 24.14 93.87 26.96 (-) 0.23 19.52 64.7</p><p>Services 29.02 79.91 31.99 35.67 20.74 134.34</p><p>Others 1.08 49.37 16.78 (-) 14.80 11.2 (-) 16.04</p><p>Total 17.21 81.17 23.41 0.86 16.88 58.48</p><p>Source: RBI</p><p>3.03</p><p>4.97</p><p>4.2</p><p>5.73</p><p>2.19 2.05</p><p>1.161.61</p><p>0.73 0.550.34 0.22</p><p>0</p><p>1</p><p>2</p><p>3</p><p>4</p><p>5</p><p>6</p><p>7</p><p>Public Sector Banks Private Sector Banks Foreign Banks</p><p>March 2012March 2011March 2010March 2009</p></li><li><p>8/10/2019 Corporate Debt Restructuring Mechanism</p><p> 3/3</p><p>Table 4: Ratio of Restructured standard advances to gross advances (%) across sectors</p><p>Source: RBI</p><p>The above table shows that within sectors, Gross advances and Restructured standard advances for</p><p>Industry sector is predominantly higher at 8.24 per cent (with medium and large industries sector</p><p>being at 9.34 per cent) and at a CAGR of 19 %. Ratio for agriculture stood at 1.45 per cent, while that</p><p>for services stood at 3.99 per cent (with micro and small services being 0.94 per cent).</p><p>Challenges:</p><p> Need of ethics:In past few years number of cases and volume of loans for debt restructuring</p><p>had grown enormously. The problem arise because, CDR mechanism have not been used</p><p>very ethically and judiciously. Hence, to follow CDR in ethical way is still a challenge for</p><p>Banks and financial institutions. Constraints of time and skills:further, lenders have to rely on the due-diligence done and</p><p>certificates given by external professionals which create a lack of transparency in the</p><p>restructuring process.</p><p> Other issues: Excessive leveraging by borrowers, coupled with slowdown in the economy</p><p>which some time results into restructuring benefit for an unscrupulous borrower with an</p><p>unviable account.</p><p>Road ahead: In 2012, banks were approached for debt restructuring in a record 126 cases and</p><p>collective amount of Rs 84,000 crore which shows sign of concern in terms of growing bad debts for</p><p>banks. To overcome these issues, Reserve Bank of India (RBI) has sharply raised the provisioning</p><p>requirements for restructured loans of banks to 5 per cent from existing 2.75 per cent. The new</p><p>guidelines say that, for accounts restructured prior to March 31, banks would have to make</p><p>provision of 3.75 per cent in the first phase effective March 31 2014. And in the next phase, it will</p><p>be 5 per cent with effect from March 31, 2015. Central bank has also asked banks to give</p><p>information on restructured advances in their annual balance sheets separately for both stressed</p><p>and satisfactory performance account which is expected to create transparency in the system.</p><p>Further, restructuring is an instrument for helping troubled segment of the economy to overcome</p><p>difficulties and make control over indefinite circumstances. Restructuring was brought for the</p><p>larger benefit of the economy and the society; it should be available to all types of lender in a</p><p>timely and non-discriminate manner. This can be achieved by developing necessary structures,systems and processes and by following necessary objectives.</p><p>1.11.44 1.38 1.45</p><p>4.87</p><p>7.6</p><p>5.98</p><p>8.24</p><p>1.432 2.05</p><p>3.99</p><p>1.782.62</p><p>1.91</p><p>1.45</p><p>0</p><p>1</p><p>2</p><p>3</p><p>4</p><p>5</p><p>6</p><p>7</p><p>8</p><p>9</p><p>Agriculture Industries Services Others</p><p>March 09 March 10 March 11 March 12</p></li></ul>