Management of stressed assets through Corporate Debt Restructuring (CDR) mechanism.

Santosh RamaswamyCDR Cell November 23, 2013

Genesis & Evolution.

Structure & Key concepts.

Present position (data) & issues.

The GenesisNeed for evolving a mechanism for addressing

stress on bank assets due to external reasons in the economy and also some internal reasons.

Need for a formal, transparent & structured approach in a multi-lender environment.

Need to preserve stakeholder value.

Legal Basis

CDR is a voluntary, non-statutory body. A system based on Debtor Creditor Agreement (DCA) and Inter Creditor agreement (ICA). DCA & ICA provide the legal basis to the CDR mechanism.

ObjectivesProvide timely and transparent mechanism to

restructure corporate debts of viable entities.

Minimize losses to Banks and other interested parties on account of avoidable company failures.

Pre-empt companies being put to unnecessary liquidation.

Prevent failure on the part of Banks to restructure for want of agreement among themselves.

The EvolutionCDR mechanism put in place by RBI in August 2001

Eligibility: Corporates with exposure of Rs.20 crore and above.

Secured creditors with minimum 20% share in either WC or TL can refer a case to CDR.

75% of secured creditors by value agreeing to restructuring will be binding on the rest.

The Evolution (contd..)February 2003 – High Level Group – Mr Kamesan

Two Categories of borrowers: Category I (Standard & Substandard A/cs) and Category II (Doubtful A/c’s).Exit option built in.Deb to equity conversion.

November 2005 – Special Group – Mrs Shyamala GopinathReduction of eligibility to outstanding exposure of Rs.10 crore.Support of 60% of creditors by number in addition to 75% by

value.

The Evolution (contd..)On August 27, 2008 RBI issued a comprehensive circular on CDR superseding all earlier guidelines

Non–statutory mechanism based on ICA & DCA with “Stand still” clause and penal provisions built in.

Viability should be determined by banks –parameters included ROCE, DSCR, Gap in IRR and cost of funds, Sacrifice, etc.

Restoration of asset classification and upgradation on satisfactory performance.

Allowing conversion of principal into debt instruments / equity.

STRUCTURETHREE TIER STRUCTURE

CDR Standing Forum and CDR Core Group

CDR Empowered Group

CDR Cell

CDR STANDING FORUM & CORE GROUPGeneral Body of all members represented by their Chairman.Self empowered body to lay down policies and guidelines.Can review individual decisions of the CDR Empowered Group The Forum to meet once in six monthsCDR Core Group carved out of the Forum comprising Chairman of IDBI, ICICI, SBI, PNB, BOB and BOI. CDR Core Group takes policy related decisions on behalf of the Forum.

CDR Empowered Group (EG)CDR EG consists of ED level representative of IDBI, ICICI and SBI as standing members, in addition to all other members. CDR EG to decide on restructuring of individual cases within a time frame of 90 days or maximum 180 days with the approval of Core Group.The decision of CDR EG shall be final.

CDR Cell Comprising officials on deputation from Core Group

member Banks. To assist the Forum and the Group in all their functions.All references for restructuring are made to CDR Cell.Initial scrutiny of proposals received to decide whether the proposal is prima facie viable.Scrutiny of Final package to ensure adherence to RBI/CDR guidelines.

Issuance of LOA and any other directions given by CDR EG.Monitoring overall progress in respect of sanctioned cases.

Membership

Institution Banks

CategoryTotal

Member of CDR System

Non-member of

CDR System

All-India FIs 14 11 3Public Sector Banks

26 26 -

Private Sector Banks

20 14 6

Total 60 51 9

Key Concepts

Inter Creditor Agreement – signed by all members.Debtor Creditor Agreement – signed by borrower.Stand Still Period – no legal action to be taken.Super Majority – 75% by value & 60% by number.Holding on Operations – continue operations at existing level.TRA – all debits and credits from single account.Monitoring mechanism – check on the conduct/compliance.

CDR SYSTEMFinal Restructuring Proposal to be put up to CDR

EG within 90 days / maximum 180 days for approval. On approval by super majority CDR Cell to issue

the Letter of Approval (LOA) to MI / Lenders.Lenders to implement the package within 120 days

to avail regulatory concession in asset classification.Monitoring of approved account to be done through

Monitoring Committee.

CDR Statistics – From inception till September 2013

Proposals No.of cases

Total Debt (Rs. Crore)

Referred 580 362370

Rejected 96 45256

Under Process 53 44828

Approved 431 272285Exited Successfully 67 51105

Withdrawn on failure 103 24915

Live cases in CDR 261 196266

Year-wise CDR Statistics (Rs.crore)Particulars Upto

FY 2008-09FY 2009-10 FY 2010-11 FY 2011-12 FY 2012-13 FY 2013-14

(upto Sept.2013)

No Amt No Amt No Amt No Amt No Amt No Amt

Referred 225 95815 31 20175 49 22614 87 67889 129 91497 59 64380

Rejected 29 5018 3 2032 10 2617 17 11150 29 16228 8 8211

Approved 184 86536 31 17763 27 6615 50 39601 106 76615 33 45156

Exited Successfully 43 31572 2 1153 6 680 6 9672 6 7247 4 780

Withdrawn on Failure 47 7191 7 646 11 732 9 2767 12 4352 17 9227

Trends in CDR references

Trends in restructuring

Increase in RSA (restructured standard advances) at CAGR of 42.54% vis-à-vis increase in gross advances at CAGR of 19.13% during period 2009-2012.

Ratio of RSA to Gross advances 5.73% in PSBs, 1.61% for private sector banks. The level is increasing in PSBs and reducing in private sector banks.

Medium & large industries and services sector are major contributors.

Major industry‐wise references

2013-142012-13

Major Industry exposure in approved cases

Some issuesViability issues

Additional finance

Restructuring of non-CDR lenders

Delay / Non-implementation of approved package

Right of Recompense

RBI GuidelinesAsset Classification - Downgrade asset classification for all cases

of restructuring. Effective from April 1, 2015.

Existing relaxations in asset classification for DCCO to continue.

Enhanced Provisioning requirement for standard restructured assets from 2.75% to 5% for fresh restructured assets.

Period for ascertaining viability of borrower.

Promoter’s contribution to be stipulated at higher of 20% of banks’sacrifice or 2% of restructured debt (as against existing contribution at 15% of bank’s sacrifice).

RBI Guidelines (Contd…)

Conversion of debt into equity/preference shares limited upto10% of restructured exposure (as against existing limit of 30% as per Sec 19 (2)) & conversion of equity only in case of listed companies (asagainst existing conversion to unlisted companies also available).

Mandatory personal guarantee in all restructuring (as against existing exemption from personal guarantee if the borrower is affected by external factors relating to the economy and industry).

Recompense (Mandatory in all cases)100% recompense amount if facility below base rate.Atleast 75% recompense amount for other cases.

Thank youCorporate Debt Restructuring

19th floor, IDBI Tower, WTCCuffe Parade, Mumbai-400005

www.cdrindia.org

Santosh Ramaswamy (B.Com, MBA)CDR Cell

cdr.santosh@idbi.co.in