Financial Blog Corliss Group: Desperate for breathing room

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.

The above article is a repost from TheHinduBusinessLine