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Debt restructuring swaying growth
Wed, 14 Jan Pre-Open

Various Indian companies boast high levels of debt and this subsequently burdens interest costs. The situation becomes direr when the companies revenues are dependent on approval of various projects. The delay in execution cycle getting delayed makes it difficult to service their debt. This gives rise to situation of debt restructuring often referred as Corporate Debt Restructuring (CDR). The mechanism aimed to bring the lender and borrower together to restructure debts of viable firms and giver latter a chance to perform well.

As per an article in Firstpost, approx. 10 cases were referred to the CDR cell during the December 2014 quarter with loan amount totalling to Rs 70 bn. On the other hand, about 35 cases worth Rs 200 bn failed on account of inability to revive operations or lack of compliance with regulations during the said period. Reportedly, most of these loans are likely to become non-performing assets (NPAs)

The CDR cell provides relief to companies through lenient interest and repayment terms. However such increasing instances have been becoming worrisome for banks and other corporates. This is a classic example of how a policy with a good motive can be misused in the absence of proper checks and regulations. The practice has locked funds with inefficient firms and thus blocked the funds for viable projects that could have helped economy grow better.

CDR mechanism has been repeatedly misused by large corporates with strong political links to get temporary reliefs on their loan commitments. The Kingfisher debacle for instance, came as a huge blow to behemoth State Bank of India (SBI) which had the maximum exposure to the beleaguered airline. This was just the beginning. Many more corporates have been adding up to this list. But even Banks have been equally guilty of managing to under report slippage of loan quality in their balance sheets.

Indian banks, particularly the PSUs have been struggling with the problem of bad loans for quite a while. Continuing stress in the banking system can delay the economic recovery process as the banks may not be able to take fresh exposure to companies until banks are able to recover their old debts. However, the government refuses to see an end to the problem. Lack of legal redress for banks and investors by way of bankruptcy law has accentuated the problem. Thus we await more action from government and RBI that can offer some solution which can take care of interests of both the parties.

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Mar 23, 2018 (Close)