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Do banks benefit from debt restructuring?
Nov 20, 2015

As the Indian banking system continues to grapple with stressed assets, the corporate debt restructuring mechanism has not been of much help to it. Under the corporate debt restructuring scheme, banks waive off the interest component or restructure interest rate downwards to aid defaulting corporate borrowers in loan repayment. As per the Corporate Debt Cell, 24 cases valued at Rs 193 billion have failed to exit successfully in the first half of the current financial year. Only four cases valued at Rs 18 billion have met with success during the same period.

As per the CDR Cell data, the success rate has been less than 35% for 530 cases approved for restructuring by bankers at the cell as on 30 September 2015. Reasons for failure in the CDR include inability by the promoter to bring in the required 2% of the restructured loan amount or poor monetization of non-core assets due to slow economic revival.

As per a survey by Ernst & Young, majority of bankers feel that the CDR forum has been misused by the corporate world. In the first half of the fiscal, the CDR cell has not received any fresh referrals for restructuring and has also not cleared any pending cases. Another reason for banks not being so forthcoming in restructuring new loans is the revised RBI provisions that require them to provide for restructured loans at par with non-performing loans.

Moreover, RBI has also provided a number of other options to banks to deal with stressed assets. These include joint lender forum mechanism for early recognition of stress and 5/25 refinancing scheme for extension of tenure in case of infrastructure projects. Recently, the central bank provided a more powerful tool in the form of strategic debt restructuring (SDR) to help banks clean up their balance sheets. Under the norms, banks have been empowered to convert debt into majority equity holding, change the management or sell assets to recover their dues.

SDR certainly scores over CDR in bringing large corporate borrowers in toeing the line of debt contracts. But banks will be faced with the challenge of finding appropriate buyers for assets within 18 months without compromising on the rights of minority shareholders.

Data Source: Livemint; CDR Cell

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