There are occasions when corporate find themselves in financial difficulties because of factors beyond their control and also due to certain internal reasons. For the revival of such corporate as well as for the safety of the money lent by the banks and financial institutions, timely support through restructuring of genuine cases is called for. However, delay in agreement amongst different lending institutions often comes in the way of such endeavors. Based on the experience in countries like the UK, Thailand, Korea, Malaysia, etc. of putting in place an institutional mechanism for restructuring of corporate debt and need for a similar mechanism in India, a Corporate Debt Restructuring System was evolved and detailed guidelines were issued by Reserve bank of India on August 23, 2001 for implementation by financial institutions and banks.
The Corporate Debt Restructuring (CDR) Mechanism is a voluntary non-statutory system based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA) and the principle of approvals by super-majority of 75% creditors (by value) which makes it binding on the remaining 25% to fall in line with the majority decision. The CDR Mechanism covers only multiple banking accounts, syndication/consortium accounts, where all banks and institutions together have an outstanding aggregate exposure of Rs.100 million and above. It covers all categories of assets in the books of member-creditors classified in terms of RBI’s prudential asset classification standards. Even cases filed in Debt Recovery Tribunals/Bureau of Industrial and Financial Reconstruction/and other suit-filed cases are eligible for restructuring under CDR. The cases of restructuring of standard and sub-standard class of assets are covered in Category-I, while cases of doubtful assets are covered under Category-II.
Reference to CDR Mechanism may be triggered by:
· Any or more of the creditors having minimum 20% share in either working capital or term finance, or
· By the concerned corporate, if supported by a bank/FI having minimum 20% share as above.
It may be emphasized here that, in no case, the requests of any corporate indulging in fraud or misfeasance, even in a single bank, can be considered for restructuring under CDR System.
However, Core Group, after reviewing the reasons for classification of the borrower as willful defaulter, may consider admission of exceptional cases for restructuring after satisfying itself that the borrower would be in a position to rectify the willful default provided he is granted an opportunity under CDR mechanism.
Recent Updates
1. RBI has changed the rules of the game that several corporate have played in the past few years to buy time, keep afloat companies and preserve ownership. Now, a new set of regulations announced on, will make banks more cautious as they will have to increase provisioning for sticky assets, and force promoters to share the burden of restructured loans. In other Words they will have to set aside a larger part of their earnings and classify such accounts as non-performing assets – or, bad loans – immediately. This will impact banks’ profitability and even require higher capital infusion.
2. For India Inc, loan recast by banks is set to become tougher. The corporate debt restructuring (CDR) cell has mandated that the lead bank in a consortium of lenders conduct an audit of how a company has utilized the loan before processing its request for debt recast. According to Raj Kumar Bansal, Chairman, CDR Cell, the lead bank could also press for special audit where diversion of funds and fraud are suspected. All references for corporate debt restructuring by lenders / borrowers are made to the CDR Cell. The CDR mechanism covers only multiple banking accounts, syndication/consortium accounts, where all banks and institutions together have an outstanding aggregate exposure of Rs.10 crore and above.
3. Even as bankers continue to recast loan in the hope of recovering their money, they allow their shares of such assets may turn toxic.
This article is written by Dr. K.T. Rangamani. He is a Senior Professor at VIT Business School .