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  • 8/10/2019 Corporate Debt Restructuring Mechanism

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    Corporate Debt Restructuring (CDR) Mechanism in India:

    Corporate Debt Restructuring (CDR) is a mechanism to revive doubtful corporate loans in order to

    ensure safety of money lend by the banks and financial institutions through timely support by

    restructuring the loans.

    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

    of India in consent with government and financial institutions on August 23, 2001 for

    implementation by financial institutions and banks. These guidelines on CDR were subsequently

    reviewed and revised on the basis of recommendations of a High Level Group and current

    comprehensive guidelines on CDR as well as non-CDR restructuring were issued in August 2008.

    The main objectives under this mechanism are as follows:

    To ensure timely and transparent mechanism for restructuring of corporate debts of viable

    entities facing problems, for benefit of all concerned

    To aim preserving viable corporates that is affected by the certain internal and external

    factors To minimise losses to the creditors and stakeholders through an orderly and co-ordinated

    restructuring program.

    The restructuring of a companys outstanding obligations, habitually attained by:

    Providing concessions in payment and waiving part of interest

    By converting the un-serviced portions of interests into term loans through reduction in

    margins

    Reassessment of credit facilities including working capital

    Restructuring the management

    Reduction in equity capital to make more capital available for expansion

    Conversion of debentures into equity to give relief on the compulsory payment of interest

    on the debentures etc.

    Trend Analysis: The thought to introduce CDR was to help sinking corporates if they fall under viable

    category. However, in recent years CDR comes under scanner due to extraordinary rise in the

    number and volume of advances being restructured under the scheme. Statistical trends for CDR are

    as follows:

    Table1: Trends in Restructuring:

    Particulars Mar-09 Mar-10 Mar-11 Mar-12 CAGR (%)

    Gross Advances (Rs. Crore) 27,53,365 32,27,287 39,82,954 46,55,271 19.13

    Restructured Standard Advances

    (Rs. Crore) 75,304 1,36,426 1,37,602 2,18,068 42.54

    Ratio (%) 2.73 4.23 3.45 4.68

    Source: RBI

    Trend for restructuring shows that Gross advances and Restructured standard advances grew at a

    healthy rate of 19.1 per cent and 42.54 per cent from Mar 09-Mar 12. Gross advance grew highest

    during 2011 at 23.44 per cent y-o-y, while restructured standard advances grew highly in 2010 and

    2012 by 81.17 per cent and 58.4 per cent respectively.

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    Table 2: Trends in Restructuring across Banks:

    Particulars

    2009-10 2010-11 2011-12

    Gross

    Advances

    Restructured

    Standard

    Advances

    Gross

    Advances

    Restructured

    Standard

    Advances

    Gross

    Advances

    Restructured

    Standard

    AdvancesAll Banks 17.21 81.17 23.41 0.86 16.88 58.48

    Public Sector

    Banks19.81 96.59 22.98 3.86 16.02 58.33

    Private Sector

    Banks12.8 5.6 26.6 (-)28.48 20.65 67.35

    Foreign Banks (-)1.38 (-)25.06 19.06 (-)27.56 16.35 (-)23.76

    Source: RBI

    Ratio of Restructured standard advances to gross advances (%) across Industries:

    Source: RBI

    If we see the exposure of banks towards restructuring, public banks are way ahead of private and

    foreign banks which shows that large number of restructuring cases are handled by public banks.

    During March 09 to March 12, Ratio (Standard advances to Gross advances) for banks grew at a

    CAGR of 24 per cent while for private and foreign banks it was at (-10)per cent and (-33) per cent

    respectively. This show that among all banks high risk of restructuring is associated mostly with

    public banks.

    Table 3: Trends in Restructuring across sectors:

    Particulars 2009-10 2010-11 2011-12

    Segments

    Gross

    Advances

    Restructured

    Standard

    Advances

    Gross

    Advances

    Restructured

    Standard

    Advances

    Gross

    Advances

    Restructured

    Standard

    Advances

    Agriculture 25.74 64.91 15.65 11.16 15.09 20.74

    Industries 24.14 93.87 26.96 (-) 0.23 19.52 64.7

    Services 29.02 79.91 31.99 35.67 20.74 134.34

    Others 1.08 49.37 16.78 (-) 14.80 11.2 (-) 16.04

    Total 17.21 81.17 23.41 0.86 16.88 58.48

    Source: RBI

    3.03

    4.97

    4.2

    5.73

    2.19 2.05

    1.161.61

    0.73 0.550.34 0.22

    0

    1

    2

    3

    4

    5

    6

    7

    Public Sector Banks Private Sector Banks Foreign Banks

    March 2012March 2011March 2010March 2009

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    Table 4: Ratio of Restructured standard advances to gross advances (%) across sectors

    Source: RBI

    The above table shows that within sectors, Gross advances and Restructured standard advances for

    Industry sector is predominantly higher at 8.24 per cent (with medium and large industries sector

    being at 9.34 per cent) and at a CAGR of 19 %. Ratio for agriculture stood at 1.45 per cent, while that

    for services stood at 3.99 per cent (with micro and small services being 0.94 per cent).

    Challenges:

    Need of ethics:In past few years number of cases and volume of loans for debt restructuring

    had grown enormously. The problem arise because, CDR mechanism have not been used

    very ethically and judiciously. Hence, to follow CDR in ethical way is still a challenge for

    Banks and financial institutions. Constraints of time and skills:further, lenders have to rely on the due-diligence done and

    certificates given by external professionals which create a lack of transparency in the

    restructuring process.

    Other issues: Excessive leveraging by borrowers, coupled with slowdown in the economy

    which some time results into restructuring benefit for an unscrupulous borrower with an

    unviable account.

    Road ahead: In 2012, banks were approached for debt restructuring in a record 126 cases and

    collective amount of Rs 84,000 crore which shows sign of concern in terms of growing bad debts for

    banks. To overcome these issues, Reserve Bank of India (RBI) has sharply raised the provisioning

    requirements for restructured loans of banks to 5 per cent from existing 2.75 per cent. The new

    guidelines say that, for accounts restructured prior to March 31, banks would have to make

    provision of 3.75 per cent in the first phase effective March 31 2014. And in the next phase, it will

    be 5 per cent with effect from March 31, 2015. Central bank has also asked banks to give

    information on restructured advances in their annual balance sheets separately for both stressed

    and satisfactory performance account which is expected to create transparency in the system.

    Further, restructuring is an instrument for helping troubled segment of the economy to overcome

    difficulties and make control over indefinite circumstances. Restructuring was brought for the

    larger benefit of the economy and the society; it should be available to all types of lender in a

    timely and non-discriminate manner. This can be achieved by developing necessary structures,systems and processes and by following necessary objectives.

    1.11.44 1.38 1.45

    4.87

    7.6

    5.98

    8.24

    1.432 2.05

    3.99

    1.782.62

    1.91

    1.45

    0

    1

    2

    3

    4

    5

    6

    7

    8

    9

    Agriculture Industries Services Others

    March 09 March 10 March 11 March 12

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