Mumbai: Promoters of companies are finding it difficult restructure loans on the corporate debt restructuring (CDR) platform as banks have increased their efforts in recovering dues and are stricter with their covenants now.
CDR was introduced in 2001 to help nurse struggling companies back to health. As part of the restructuring process, banks lower interest rates, increase the moratorium for payment of dues and take a hit on their books. However, banks are now asking for more corporate guarantees, higher share of promoters as well as attaching the promoters’ personal assets before agreeing to do any restructuring. The lenders have also shortened the period by which a company must pay back its dues to the banks before the lenders can sell off the assets of the companies.
The number of firms restructured under CDR but failed to exit the process rose to 12 in fiscal year 2013, amounting Rs.4,350 crore, from nine companies in the year-ago period totalling Rs.2,767 crore. So far this financial year, at least four firms have not been able to exit CDR with an exposure of about Rs.3,000 crore, according to bankers.
The total number of cases, since the inception of CDR in 2001, which failed to take off despite going through the restructuring exercise is 90, amounting to about Rs.18,000 crore. This means more than 55% of CDR failures took place in the last two and a half years.
“The cases are rising and the government is warning us against giving a leeway to companies accessing CDR to fool the system. We don’t have the luxury to nurture a company for long,” said a banker who did not want to be named.
Finance ministry officials became vocal in 2012 against banks admitting companies to the CDR process and giving “unscrupulous promoters” a chance to take the banking system for a ride. Financial services secretary Rajiv Takru recently warned that banks will wrest control of a company if it is badly managed. Banks have the right to sell off any company which has been badly managed, he said.
Reserve Bank of India (RBI) governor Raghuram Rajan, in his maiden speech last week, said that promoters “do not have a divine right to stay in charge regardless of how badly they manage an enterprise, nor do they have the right to use the banking system to recapitalize their failed ventures.” The governor said the debt recovery tribunal should expedite settlement of cases and asked deputy governor K.C. Chakrabarty to take a close look at rising bad assets and the restructuring process.
Aggregate debt being nurtured by the CDR cell has risen to Rs.2.5 trillion as on June 2013, from Rs.86,536 crore in March 2009. The number of cases accepted under the CDR mechanism has risen to 415 from 184 in 2009, ever since the cell started releasing the numbers in the public domain. Between June 2012 and June 2013, 116 companies applied to avail of CDR with a debt totalling more than Rs.1.1 trillion.
“The debate should not be how banks are acting tough and companies cannot come out of CDR, but how economy is not doing good and companies are in stress,” said Shyamal Acharya, deputy managing director and head of mid-corporate group at State Bank of India. Acharya expects more cases to be rejected by the CDR cell, and assets sold off to recover dues, as economic activity slows and firms find it difficult to sell their products.
However, some companies are refusing to exit the CDR cell as they enjoy loans at a concessional rates. “Some companies, even after becoming healthy, are not willing to get out of the CDR cell. That’s an area of concern,” said the unnamed banker quoted above.
The reason for this could be the banks themselves.
The main issue of contention is the right to recompense clause. This clause spells out how much of the losses incurred during restructuring should be borne by the lenders and the portion of the losses a company should pay before being allowed to leave CDR. Negotiated heavily at the start of any restructuring exercise, banks earlier used to agree to settle for as little as 30% of the losses incurred during the restructuring process.
Now the banks have started asking for 100% right to recompense. They are also insisting that a promoter should bring at least 25% of the restructured amount to the table as equity before a restructuring can be done. This is more than RBI’s minimum requirement of 20% in promoters’ equity.
Recently a company had to pay Rs.100 crore as recompense before banks let it exit CDR, said a banker who also did not wish to be named. The company was not exiting CDR despite becoming healthy.
In recent weeks, there have been at least three cases where the CDR exercise was completed but the companies failed to come out of the CDR process as they could not meet the minimum requirement of banks. Prag Bosimi Synthetics Ltd, Varun Industries Ltd, Koutons Retail and KS Oils Ltd could not be revived even after restructuring, senior bankers said.
Prag Bosimi, the first public-private partnership project in the northeast, produces polyester yarns. The company’s CDR process was completed in fiscal 2009, and it started operation after a decade in 2012. However, it failed to exit the CDR cell and banks may go for legal proceedings to recover dues, bankers said. Varun Industries, in which banks had an exposure of Rs.1,632 crore, and which entered CDR cell in January this year, has also failed to exit, sources said.
A PTI story said Punjab National Bank has set aside Rs.1,000 crore as bad debt on Koutons Retail as the firm’s CDR failed.
Emails sent to all the companies asking for comments remained unanswered.