CDR failure rate has inched up significantly: IDBI Bank

Reema: The recent report suggested that four corporate debt restructuring (CDR) cells which are worth Rs 14,000 crore have ended in failure just in the first five months of FY15. So namely it was Bharati Shipyard, Hotel Leela, Electrotherm as well as SBQ Steel. Can you tell us the key reasons for the failure?

A: Basically the failure happens because of multiple reasons. We need to understand that failures have been happening earlier also but certainly last one year and maybe I would say one and a half year, the failure rate has gone up partly because the economy, which was expected to be doing well and improve, has not improved to that extent what was projected to be at the time of giving a restructuring package.

Promoters who were supposed to bring some money through equity, they have not been able to bring that much money through equity.

Sumaira: How do things move from here because if the promoters are unable to bring in the equity, do you think it is a matter of time till the economic cycle picks up or do you think that even the banks are a little bit reluctant now given the history of the company that they have to also release funds on their part?

A: Banks normally release funds when it is a part of package and as per CDR packagee, let us say additional funding has to be given to these companies. Promoter is supposed to bring the money, if he doesn’t bring the money so they are not able to comply with some of the conditions and accordingly banks also don’t disburse the money at that point of time. But I think the economy doing well and the equity market doing well. So wherever this problem was there of equity infusion, I think that should be sorted out to the large extent.

Reema: So currently what will the failure rate be of CDR banks as a percentage?

A: Up to March 2014, if you see, we had total 467 cases which we have approved and the amount was Rs 3,30,000 crore out of which we had failure of 121 cases, so number wise it could be about 25 percent but the amount was only Rs 30,000 crore, which is only 9 percent. The number looks large because smaller cases have this tendency sometimes of not being able to go through the entire process. But let us not forget that other than this Rs 30,000 crore there are cases of Rs 3 lakh crore which are successful which have already exited or implemented fully and they are undergoing the restructuring as such.

Sumaira: It is not just the companies which then bear the brunt of these CDR failures even their creditors, the bankers, would. What would this mean, what kind of a message would this send out to the creditors or what would this mean for the asset quality of banks?

A: Brunt is more on the lenders rather than the company. Company anyway knows that it has become already sick, isn’t it? But the percentage if you see is only Rs 30,000 crore out of Rs 3,30,000 crore which is 9 percent and these become non-performing assets (NPAs) and as you said in the beginning as perhaps some of the failure - big cases have failed in the first five months because of different reasons again like shipyard, hotel -- hotel was anyways he has good estates, the value of the estates are much more than the loans, so I don’t think lenders will take any hit in that case. Shipyard will have an issue.