Mumbai: Bankers have asked the Reserve Bank of India (RBI) and the finance ministry to tweak the corporate debt restructuring (CDR) norms, such as allowing turfing out the management and changing the covenants of loan agreements, said executives privy to the discussions.
After the failure of schemes such as the strategic debt restructuring (SDR) scheme and the scheme for sustainable structuring of stressed assets (S4A), Indian bankers want to return to the at least 15-year-old CDR mechanism to solve the Rs7-trillion toxic debt problem. At the monetary policy announcement earlier this month, RBI governor Urjit Patel had said that the regulator will come out with new guidelines to deal with stressed assets.
DNA had first reported the reviving interest in CDR in March citing State Bank of India (SBI) chairman Arundhati Bhattacharya.
“The CDR cell gives us a lot more flexibility in trying to solve a stressed case. There is no one-size-fits=all solution here,” said the deputy managing director of a large public sector bank, speaking on condition of anonymity. “In a recent meeting, we have discussed these proposals to amend the CDR with RBI and finance ministry.”
The key part of the proposal is this: bankers need powers under this rule to push errant borrowers to give up ownership and voting rights, effect a management change and even split the debt into sustainable and unsustainable parts to better restructure loans.
“All restructuring proposals will be undertaken with the approval of the overseeing committee, so that there are no concerns of malpractice," the banker cited earlier said.
To be sure, some of these facilities like converting debt into equity or into sustainable and unsustainable parts are available under different rules such as S4A and SDR, but the rules for invoking them are quite rigid. Under the current CDR rules, banks can convert only 10% of debt into equity.
They also don’t allow bankers to change covenants of the loan agreement and change the tenor of the loan, which greatly limits the ability of lenders to restructure the asset.
“When you cannot change the structure of the loan, then you have not achieved any restructuring. The whole exercise becomes moot,” said the second banker cited earlier.
“This sounds like a potential way for banks to address a stressed account. If they can detect the stress early on, it’s possible to recognise and address it quickly with minimal impairment,” said Nikhil Shah, managing director, Alvarez and Marsal India, a stressed assets consultancy. “A structure which allows lenders to restructure debt to a sustainable level would be very helpful. Along with the insolvency process, stressed accounts could be resolved, which would preserve value for lenders.”
The CDR cell was popular in 2011-2014 when problem of non-performing assets (NPAs) started to take root. Then bank could restructure assets without any additional provisions and still call these bad loans as standard assets. From April 2015, this forbearance was withdrawn. Following this, lenders had stopped sending cases to the CDR cell for restructuring.
"Now that we have provided for most stressed cases under the asset quality review (AQR), there is no question of saving on provisions. We feel that the CDR cell is best placed to restructure these loans,” the first banker cited earlier said.
According to data available with the CDR cell, loans worth over Rs2 trillion were live and were being restructured under the cell as on 31 December. The cell has seen loans worth Rs1.25 trillion exit owing to failure, while loans worth Rs70,851 crore had exited successfully during the same period.