BackCorporate debt restructuring: References fall but the worst isn’t over yet
In January-November 2014, 38 cases involving a combined debt of Rs42,000 crore were referred to the CDR cell
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Mumbai: The number of companies looking to restructure debt in the first 11 months of 2014 dropped to one-third of the level in the previous year, reflecting the fact that the bulk of the recast is already complete.
New rules on stressed assets put in place by the Reserve Bank of India (RBI) early in 2014, too, contributed to the decline.
In January-November 2014, 38 cases involving a combined debt of ₹ 42,000 crore were referred to the CDR cell, compared with 114 cases involving ₹ 1.4 trillion in January-December 2013, according to two bankers from the cell.
There may be an increase in the number of companies seeking a debt recast in the January-March 2015 period as the RBI’s regulatory forebearance towards restructured assets comes to an end at the end of the current fiscal year, said R.K. Bansal, chairman of the CDR cell.
“But the trend largely suggests that the number is going to be much lower than what it was last year," said Bansal.
Starting in April, banks will be required to treat restructured loans as non-performing assets (NPAs) and will need to set aside a minimum of 15% of loan value to cover the risk of default. For now, banks are being allowed to treat restructured assets as standard and are setting aside 5% of loan value to cover default risk.
In the three months ended 30 September 2014, 14 cases, totalling ₹ 13,300 crore, were referred to the CDR cell, Mint reported on 27 October. In the three months ended 30 June 2014, only two referrals were made to the cell, amounting to ₹ 2,854 crore.
Many corporate borrowers sought to restructure their debt, which typically means longer repayment cycles and lower interest rates and creditors sacrificing a part of the principal amount. For banks, it means not having to classify the loan as an NPA and making provisions against it.
As of 30 September, the CDR cell had approved the restructuring of ₹ 3.67 trillion of corporate debt since it was formed in the early 2000s. Of this amount, ₹ 2.62 trillion of debt was still being actively recast; the rest of the amount was owed by borrowers who had either completed their CDR exercises successfully or had failed to do so.
To be sure, the recent fall in the number of references to the CDR cell may not imply the worst is behind. In January-November 2014, the CDR cell approved 68 cases of restructuring involving ₹ 82,209 crore of debt, compared with 81 cases involving ₹ 77,000 crore in January-December 2013. These include cases that had been pending approval.
Bankers say that one key reason behind the fall in the number of references to the CDR cell is RBI’s new stressed asset management framework, which took effect on 1 April. Under the new norms, joint lenders forums (JLFs) required to be set up for overdue accounts are recommending restructuring directly, without routing such accounts via the CDR cell.
“It would be premature to say that stress has reduced. Since banks are now forming joint lender forums under the new stressed asset norms, the need to approach the CDR cell has reduced. But there is some restructuring outside the cell too," said a senior official at a state-run bank. He spoke on condition of anonymity because he is not authorized to speak to the media.
The new rules state that lenders need to carve out a special category of assets termed special mention accounts (SMAs) in which early signs of stress are visible. Accounts within this category will be put under three sub-categories, based on the period for which their principal or interest payments are overdue.
The duration of overdue payments can range from under 30 days to over 90 days. A JLF is mandatory for accounts that are overdue for more than 60 days. Loan repayments that are more than 90 days overdue are classified as NPAs under existing regulations.
The JLF is required to arrive at an early and feasible solution to preserve the economic value of the underlying assets as well as the loans. Lenders in the forum are required to prepare a corrective action plan under which they may choose to rectify the problems, restructure the account or recover the loan amount, according to RBI’s guidelines.
“The CDR cell has become a last resort for corporates since the success ratio is low and operational restrictions imposed by banks are high," said Nikhil Shah, managing director of Alvarez and Marsal India, a company that provides turnaround services for troubled companies.
“The viability studies conducted by the CDR lenders earlier were not credible, which has led to the borrowers not being able to achieve the projections presented to the CDR cell. Banks are recognizing stress in their accounts earlier and are now more hands-on in approaching other modes of restructuring accounts, rather than depending on the CDR cell," he said.
According to data available with the CDR cell, 29 cases involving loans worth more than ₹ 18,000 crore exited the cell on account of failure in January-September period 2014. In the same time, there were six successful exits, involving loans worth ₹ 5,580 crore.
Of late, banks have become tougher with defaulting borrowers, often insisting on asset sales and a change in business plans to deal with the stress.
Assets of Bharati Shipyard Ltd and Hotel Leelaventure Ltd worth ₹ 5,800 crore and ₹ 4,300 crore, respectively, were sold to asset reconstruction companies by their creditors. Both exited the CDR cell on failure of implementation of their CDR packages.
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