Banks seek mechanism to ensure effective CDR process

Q: A lot of the deliberations seem to be surrounding the role of the promoter and his contributions and sacrifices made in a CDR proposal. Is it to do with recent instances like Kingfisher where bankers and the promoters have not been able to agree on the kind of equity that the promoter needs to bring and the sacrifices he needs to make on a recast?

Mallya: Every account needs to be analyzed on a case to case basis. I don’t think Kingfisher has been a case which has been referred to CDR. Now if you look at the genesis of the CDR mechanism and how effective it has been over a period of time, I think it has served its useful purpose in rehabilitating the units.

Therefore per se we are not feeling that CDR is not a good mechanism but there should be appropriate covenants in place, there should be appropriate monitoring mechanism so that the effectiveness of the CDR is not lost sight of. I think that has been the major concern and that is a major point around which the whole discussions have taken place.

Q: There is a common apprehension that at the end of the day it’s banks who get a raw deal from the CDR while promoters sometimes walk away with a much fairer deal despite leading the company into distress. Would you say that’s a fair apprehension?

Kumar: I think it is little too premature or unfair to make a generalised statement like that. The CDR mechanism has been there for about more than a decade now and at a time when the whole economy is going through a difficult cycle, it is only natural that the industries go through difficult times also. This is the time when the bankers need to lend support.

We have come across cases where the units get into CDR and have performed well. These are units which have been there in business for decades, so you just cannot say that bankers are getting a raw deal.

There is a right of recompense class which is built into the entire CDR mechanism, so even if we do give certain concessions by way of interest rates, whether it is a WCTL (Working Capital Term Loan) or an FITL (Funded Interest Term Loan), there is a right of recompense class built into it so that when the unit does well we are able to recover whatever sacrifice that the bank has made.

Secondly, the promoter also has to bring in as of now 15% of the sacrifice made by the banks as his contribution. So I think it’s unfair to say that the promoters are walking away. It’s a case to case basis we take. If the unit is not viable, we don’t even take it up for restructuring. There have been a number of cases which have been rejected where we have found it unviable.

Q: From an economic point of view, do you see yourself pass the peak of number of accounts which need to be restructured or do you think the numbers are still growing and you have not hit a peak given the kind of feedback that you are getting from clients and your account managers?

Mallya: As far as Bank of Baroda is concerned, I think few large accounts were restructured during the last year therefore the amount might have looked slightly high. But then looking at this point in time, even though the pains in the system do continue, to my mind as far as our portfolio is concerned I think we have gone past the highs of the restructuring. Therefore, a significantly lower amount of restructuring could be on the cards as far as current year is concerned.