Home / Industry / CDR failure rate points to limitations of approach

Mumbai: The corporate debt restructuring (CDR) cell’s failure rate was 43% (on the basis of data available till the end of June), indicating the limitations of the approach.

The failure rate was 36% a year ago which means that things have gotten worse.

Since its inception in 2001, the cell has approved CDR in 530 instances. Of that, 228 had failed in the implementation stages as of the end of June. “Most cases that have failed are from the infrastructure sector as restructuring packages typically prescribe only a two-year moratorium, even though these cases need long-term hand holding," said a banker.

Infrastructure projects typically take a long time to develop, and longer to pay back, and bank loans of a five- to seven-year tenure and short-term restructuring options, only delay the inevitable, the banker added, asking not to be identified. 

Meanwhile, the level of stressed assets in the system is increasing. In a speech on 24 August, Reserve Bank of India deputy governor S.S. Mundra said that the level of stressed loans—the sum of gross bad loans and restructured loans—had increased to 12% of total loans at the end of June, compared with 11.4% three months earlier. A week earlier, he said the fresh accretion of bad loans had decreased significantly, even though more restructured assets were lapsing into bad loans.

Among the companies where CDR has failed in the first three months of this financial year are Arch Pharmalabs Ltd (restructured debt worth Rs2,300 crore), ARSS Infrastructure Projects Ltd (restructured debt worth Rs1,400 crore) and Surana Industries Ltd (restructured debt worth Rs1,100 crore), the banker said.

In terms of loan amounts, at the end of the first quarter, restructuring of corporate debt worth Rs97,242 crore had failed. That represents about one-fourth of the Rs4 trillion loans approved for restructuring in the last 15 years.

At the end of June, only 94 cases with debt worth Rs68,894 crore (or 17%) had successfully exited the CDR cell.

“In July, about eight more (restructuring) cases with loans around Rs4,000 crore have failed, while only two cases with loans worth around Rs1,000 crore have exited successfully," said a second banker, who, too, didn’t want to be identified.

Banks have not added any fresh cases of restructuring since 31 March 2015 after the Reserve Bank of India changed its guidelines and stipulated the same amount of provisions as an outright bad loan. Currently, that provision stands at 15% of the loan amount.

While experts don’t want to call this the death knell of the corporate debt restructuring cell, the central bank has shown a clear preference for other mechanisms such as strategic debt restructuring (SDR) and the scheme for sustainable structuring of stressed assets (S4A), where it has pushed bankers to either take control of failed companies and sell them to buyers, or ensure that they get a better price for the equity they hold in such firms.

“The CDR is currently the least desirable of options for bankers. Some of the options available with the lenders under SDR and S4A are far better than what they would have under CDR. With the introduction of the bankruptcy code, the need for a cell that manages stressed cases will also go away," said Dinkar V, partner-restructuring at global consultancy firm EY.

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