Banks bring cases to the CDR cell to negotiate relaxed repayment terms with struggling borrowers
Amidst mounting concerns that many promoters, who have got their loans restructured, are misusing the corporate debt restructuring (CDR) mechanism, bankers, on Monday, called for higher equity infusion to the tune of one-fourth of the CDR demand.
“We have decided to demand higher capital infusion, to the tune of 20-25 per cent of the CDR amount being sought by the promoters of companies that seek loan revamp, from the current 15 per cent. However, no final decision has been taken,” State Bank of India Deputy Managing Director Soundara Kumar told reporters after a hurriedly convened meeting of the CDR cell here.
According to reports, already loans worth over Rs.60,000 crore have gone for CDR last fiscal, a whopping 156 per cent from a year earlier, making it the highest since the CDR cell was launched in 2001.
The number of CDR cases jumped to 84 during 2011-12, compared to 49 a year earlier.
Significantly, this amount is excluding the Rs.22,000-crore CDR of Air India, which was done outside this cell, and those of State electricity boards, which is close to Rs.30,000 crore. A recent Crisil report said losses of discoms rose by 24 per cent to Rs.27,500 crore between 2006-07 and 2009-10, which may rise to Rs.35,000-40,000 crore in 2010-11.
Banks bring cases to the CDR cell, an informal forum of bankers approved by the Reserve Bank of India, to negotiate relaxed repayment terms with struggling borrowers.
Cases brought to the CDR during the year included big-ticket loans to telecom tower services provider GTL, shipbuilder Bharati Shipyard, Hindustan Construction, Leela Hotel and several sugar and steel mills.
Non-performing loans of banks rose to 2.9 per cent of the total loans at the end of December, from 2.3 per cent in March 2011, according to RBI data, while ratings agency Crisil sees bad loans to rise to Rs.2 lakh crore or 3.2 per cent of the total by March, 2013.
Crisil said loans worth Rs.75,000 crore had already been either restructured or their restructuring was underway during the nine months to December 2011.
Nearly 30 per cent of new restructuring is expected in the power sector. The other susceptible sectors include aviation, construction, engineering, steel, textiles and telecom infrastructure.
The bankers also discussed the need for demanding board representation on the companies that go in for CDR, Central Bank of India Executive Director R. K. Dubey told reporters, adding that the meeting also called for suggestions from banks on revamping the entire CDR mechanism.
Another suggestion mooted was to demand personal guarantees from the promoters, so that better accountability could be expected, apart from ensuring that if a change in management was required it could be done easily. There was also a call for making the promoters pledge their entire holdings in the company that was seeking CDR. Though Bank of Baroda Chairman and Managing Director M. D. Mallya and Union Bank of India Chairman and Managing Director D. Sarkar attended the meeting, they did not speak to the reporters.
Mr. Dubey said the suggestions would be submitted to the RBI and the Finance Ministry, which would take a final call on the issue.
Though the bankers said, given the fact that the Finance Ministry was not happy with the way the CDR mechanism was being used by various companies, there was a broad consensus on the need for a fresh set of guidelines for CDR. However, they said nothing had been finalised as yet.
The meeting was held following a letter from the Finance Ministry last month, in which it warned banks against taking on their books quasi-securities such as convertible preference shares that had a long tenure, low returns and high provisioning as it doubts that many promoters had been suspected of diverting funds after CDR or were into mismanagement of the company, he said.
The Ministry also suggested that banks use the security enforcement law to change the management that had siphoned-off money from the company.
While the law empowered lenders to do this, banks had rarely taken such extreme steps.
The letter comes at a time when corporates, battling huge debt and shrinking cash flows, are knocking on the doors of banks to revamp their debts to avert the defaulter tag.
Other suggestions included determining the methods of recompense amount, pre-determining the exit clause for CDR companies since some companies did not want to come out of the CDR.
Mr. Dubey said there was consensus among bankers that margins should be brought upfront and it should be increased. These suggestions came in light of the fact that bankers were increasingly losing money on CDR and now that they had the government with them, they wanted to trim their losses.
Another suggestion was that if a promoter was suspected of diverting funds, his case should not be entertained for CDR. That apart, banks also wanted to set the interest rate for recast loans at not less than their base rates.
The bankers insisted that these were just suggestions given by the banks, and not accepted by any body, because there were none to accept.
The also agreed to make the lead bank or the coordinating bank to coordinate more often and get updates.