Mumbai: A group of 22 banks led by State Bank of India (SBI) has cleared the recast of 10,000 crore in loans advanced to ABG Shipyard Ltd, under the corporate debt restructuring (CDR) process for bailing out financially stressed borrowers, offering India’s largest private shipbuilder a breather.

It’s the second biggest loan recast in recent times by Indian banks, next only to the 13,500 crore debt reorganization done for engineering and construction company Gammon India Ltd in July 2013.

“The bankers have cleared the CDR. This is a big relief. We have got two years to get our act together," said ABG Shipyard’s chief financial officer Dhananjay Datar in a phone interview.

“Under the CDR, around 2,500 crore worth of long-term loans and 7,000 crore of working capital loans were restructured. We will get two years of moratorium for interest payment. After moratorium, we have eight years to repay the loan," he said.

SBI is the lead banker for ABG. Other banks include ICICI Bank Ltd, Punjab National Bank, Bank of India, Bank of Baroda and IDBI Bank Ltd.

Many borrowers have sought debt restructuring as they battle an economic downturn that led growth to weaken to 4.5% in the year ended 31 March 2013, the least in a decade, amid high interest rates and stalled projects that have crimped corporate cash flows.

Two bankers directly involved in the CDR process confirmed the approval for ABG’s debt recast.

“We have approved the restructuring of ABG Shipyard. Banks have agreed to this after several round of discussions," said one of the bankers. The official didn’t want to be identified because the transaction pertains to a specific company.

As part of the CDR, the company will be offered a two-year moratorium, a reduction in interest rate and an extended repayment period. “As in any CDR cases, there will be a closer monitoring of ABG’s operations and the financial performance during the period of recast," the banker said.

The shipping industry is recovering from the worst glut in decades after a boom in ship orders coincided with the global financial crisis in 2008. A slump in freight rates and decline in global trade hurt demand for new vessels. Indian shipbuilders, including ABG Shipyard, have not received new orders for bulk ships since 2007.

Mint had reported in December that banks were nearing an agreement to restructure ABG Shipyard’s loans.

“The company has a strong recovery plan and hence bankers have agreed to approve the CDR. We will get out of this CDR quickly," Datar of ABG Shipyard said.

Banks had already sought the appointment of professional managers to run the company, the banker cited above said. In January, ABG Shipyard appointed Syed Waheed Zafar Abdi as its new managing director and chief executive officer to script a turnaround.

Under CDR, banks typically offer a payment holiday to a financially stressed company, stretch the period in which the loan has to be repaid, cut the cost of borrowing and sometimes even accept a so-called haircut by reducing the amount of debt the borrower has to pay back.

A CDR is approved if at least 75% of the creditors by value of the loan and 60% by number back the proposal.

“The CDR assistance to ABG could help banks, as otherwise there was a good chance of this account becoming an NPA (non-performing asset) and provisions could have shot up to above 25% as compared with 5% for a new restructured loan," said Abhishek Kothari, an analyst at Networth Stock Broking Ltd.

Banks typically prefer to restructure loans to a troubled borrower to prevent them from being classified as NPAs. That’s because while banks need to make a 5% provisioning when they restructure a loan, the provisions can rise to 25-30% if it becomes an NPA.

A surge in non-performing loans in the 84 trillion banking system has pushed banks to take an aggressive stance in recovering dues from borrowers through asset sales. The Reserve Bank of India (RBI) has emphasized the need for banks to take prompt steps for loan recovery amid concerns over the rising pile of stressed assets.

Gross NPAs at 40 listed banks in the December quarter rose 35.84% to 2.43 trillion from 1.79 trillion a year earlier. About 4 trillion of bank loans are being restructured, both through RBI’s so-called CDR mechanism and on a bilateral basis.

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