Banks seek mechanism to ensure effective CDR process

Due the adverse economic condition in the country, the past year saw a sharp spike in the number of companies approaching the CDR cell.

In this background, top bankers in the country met to discuss measures that can be implemented to tighten the provisions of corporate debt restructuring (CDR) and to discuss the way forward. “We just wanted to walk through some of the covenants to ensure that going forward the mechanism of CDR is appropriately utilized for reviving the units which need help and rehabilitation from the system, said MD Mallya, chairman and managing director of Bank of Baroda. In a debt restructuring, banks increase the repayment period, lower the interest rate and convert short-term working capital loans into longer tenure term loans so as to ease the debt burden for a company. Deputy managing director of stressed assets management at State Bank of India Soundara Kumar says that accounts from textile and the iron and steel sector will require restructuring going forward. “There is a pipeline which is pending with the CDR and some of these would be considered for restructuring depending on the viability and the feasibility of these projects,” she said. In an earlier interview, chairman of Vijaya Bank HS Upendra Kamath said that the pressure on the system could mean higher number of corporate debt restructuring (CDR) cases in FY13. Below is an edited transcript of their interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.
 
Q: There were some reports yesterday suggesting that SBI might need to recast Rs 3700 crore worth of loans in a consortium. Can you give us the reality on that front? Kumar: This number you are putting is because of the number of referrals which are pending or in the pipeline with the corporate debt restructuring (CDR) forum. As you know, in the last quarter of 2011-12 we had restructured about more than Rs 5000 crore. During this process, applications had been submitted to the CDR forum either by us or by other banks which were in the consortium. So there is a pipeline which is pending with the CDR and this includes accounts in various sectors and therefore this would happen during the year. So over a period of time, I think some of these would be considered for restructuring depending on the viability and the feasibility of these projects. Q: Can you just give us some light on which kind of sectors or large clients could be headed for this kind of restructuring? Kumar: I am not at liberty to reveal the names of the clients, but I can say that the textile sector and iron and steel sector have been going through stress and recasting is definitely required. As far as state electricity boards (SEBs) are concerned, our exposure is fairly low, so we don’t see a big chunk coming out of that. Q: Can you just take us through what happened in this bankers meet on CDR? Is it that some promoters have taken advantage of the CDR norms that you are seeking to tighten the rules? What was the motivation behind looking at a new set of recast rules now? Mallya: Since the number of cases which have been referred to CDR has increased substantially, we just wanted to have a feedback from various banks as to what exactly should be our way forward as far as the various covenants are concerned. Normally banks stipulate the package concerned, the promoter’s contribution to be brought in, which is a minimum of 15% of the sacrifices and the promoter’s personal guarantee for the loans which are granted. We just wanted to walk through some of these covenants to ensure that going forward the mechanism of CDR is appropriately utilized for reviving the units which need help and rehabilitation from the system. So the meeting which we held the other day was more in terms of review of our performance under the CDR and what should be the way forward. _PAGEBREAK_ 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.