Restructuring of Advances Presented by:- CA Santanu Ghosh 21.03.2014 ACAE

Introduction Infrastructure development is a welcome step taken by Central and State Governments. This encourages not only hard core infrastructure projects but the various other projects in the manufacturing and other sectors. With the golden quadrilateral project initiated during the Prime Ministership of Shri Atal Behari Bajpayee, we have seen phenomenal increase in the manufacturing sector including service sectors such as IT and ITES. The Banking system made substantial investment by way of Term finance and working capital finance but on account of several reasons such as changes in the market, changes in the regulations, substantial variation in the foreign exchange parity rates etc., the projects could not be completed on time. This resulted in default by the borrowers or serious hardships faced by them for genuine reason or reasons beyond their control. Such projects which are considered viable are being supported by the financial sector by way of Corporate Debt Restructuring, about which this presentation has been prepared.

Restructuring of Advance: As per the guidelines issued by the Reserve Bank of India Restructuring is divided into four categories. Restructuring of advance extended to Industrial Units. Restructuring of advance extended to Industrial Units under Corporate Debt Restructuring Mechanism. Restructuring of advance extended to Small and Medium Enterprise. Restructuring of all other advances. In the above four sets of guidelines, differentiation is broadly based on whether the borrower is engaged in Industrial activity or non industrial activity. The major criteria in the prudential regulation is that the borrowers engaged in industrial activities continued to be covered under the existing asset classification norms upon restructuring.

Eligibility Criteria for Restructuring of advance: Banks may restructure the advance under standard, sub-standard and doubtful category. Banks cannot reschedule, restructure the accounts with retrospective effect. Process of reclassification should not stop simply because the process of restructuring proposal is under consideration. Normally restructuring cannot take place unless the alteration/changes in the original loan document is made with the consent of the borrower.

Norms: Assets Classification Restructuring of advance can take place in the following stages: Before commencement of commercial production. After commencement of commercial production but before the asset has been classified as sub standard. After commencement of commercial production and the asset has been classified as sub standard or doubtful.

No account should be taken up for restructuring unless the financial viability is established and there is reasonable certainty of repayment. Parameters which are to be considered for restructuring will include Return on Capital Employed, Debt Service Coverage Ratio, Gap between Internal Rate of Return and Cost of Funds and the amount of provision required in lieu the diminution in the fair value of restructured advance. BIFR cases are not eligible for restructuring without their express approval.

Special Regulatory Treatment Asset Classification: Exposure of the banks towards the following categories are not eligible to be treated as standard asset upon restructuring. These types of advances should be immediately downgraded upon restructuring. Customer and Personal advances Advances towards Capital Markets Advances Treated as Commercial Real Estate. Accounts classified as standard assets should be immediately re classified as sub standard asset upon re-structuring.

Provision on restructured accounts: Restructured accounts classified as non-performing advances, when upgraded to standard category will attract a higher provision (as prescribed from time to time) in the first year from the date of up gradation. The above-mentioned higher provision on restructured standard advances(2.75 per cent as prescribed vide circular dated November 26, 2012) would increase to 5 per cent in respect of new restructured standard accounts(flow) with effect from June 1, 2013 and increase in a phased manner for the stock of restructured standard accounts as on May 31, 2013 as under:

3.50 per cent - with effect from March 31, 2014 (spread over the four quarters of 2013-14)

Corporate Debt Restructuring Mechanism: Objective: The objective of the CDR is to ensure timely and transparent mechanism for restructuring the corporate debts of viable entities facing problems outside the preview of BIFR DRT and other legal proceedings. Scope: The CDR mechanism has been designed to facilitate restructuring of advances of borrowers enjoying credit facilities from more than 1 bank and Financial Institutions. CDR is available to borrowers engaged in all types of activity subject to the following conditions:  

The borrower enjoys credit facility from more than One bank/FI under multiple banking/ syndication/ Consortium system of lending. The total exposure (Fund based and non fund based) is Rs10 crores and above.

CDR System has a three tier structure: CDR Standing forum and its Core Group a) This Forum would be the representative general body of all FI and banks participating in the CDR System. This is a self empowered body which will lay down policies and guidelines and monitor the progress of CDR. b) The Forum will provide an official platform for both the creditors and borrowers to amicably and collectively evolve policies and guidelines for working out the debt restructuring plans. c) The CDR Core Group will lay down policies and guidelines to be followed by the CDR Empowered Group and CDR Cell for restructuring.

d) The Forum will comprise of Chairman and MD, Industrial Development bank of India, Chairman SBI, Managing Director and CEO of ICICI Bank Ltd, Chairman IBA as well as the Chairman and MD of all banks and Fi’s participating as permanent member in the system. Since UTI, GIC, LIC may have assumed exposures on certain borrowers these institutions may participate in the CDR System. The Forum will elect the chairman for one year and the practice of rotation will be followed in subsequent years. e) The Forum shall meet at least once in every six months and would: review and monitor the progress of the CDR System. The Forum would lay down policies and guidelines including those relating to critical parameters for restructuring.

CDR Empowered Group:  a) The individual cases of CDR shall be decided by the CDR Empowered Group consisting of ED level representatives of Industrial Development Bank of India Ltd., ICICI Bank Ltd and SBI as standing members. In addition to ED level representatives of FI’s and banks who have exposure to the concerned company. b) The group will consider the preliminary report of all cases of requests of restructuring submitted to it by the CDR Cell. After the Empowered Group decides the restructuring of the company is prima facie feasible and the enterprise is potentially viable in terms of the policies and guidelines evolved by the Standing Forum, the detailed Restructuring package will be worked out by the CDR Cell in conjunction with the Lead Institution.

c) The Group would be mandated to look into each case of debt restructuring, examine the viability and rehabilitation potential of the company and approve the restructuring package within 90 days or maximum by 180 days of reference to Empowered Group. The CDR Empowered Group shall decide on the acceptable viability benchmark levels on the following parameters.   Return on Capital Employed, Debt Service Coverage Ratio, Gap between Internal Rate of Return and Cost of Funds, Extent of Sacrifice

d) The Board of each bank/FI should authorize the CEO or ED to decide on the restructuring package in respect of cases referred to the CDR System. The Group will meet on two or three occasions in respect of each borrowable account. This will provide an opportunity to the participating members to seek proper authorization from their CEO/ED in case of need.   e) The decision of the CDR empowered Group will be final if the restructuring of the debt is found to be viable.

  CDR Cell: a) The CDR Standing Forum and CDR Empowered Group will be assisted by a CDR Cell in their functions. This cell will initially scrutinize the proposals and proceed further with the proposal. If not found satisfactory the Creditors will initiate action fro recovery.   b) All references for CDR by creditors and borrowers will be made to the CDR Cell. The CDR cell will prepare the restructuring plans in terms of the general policies and guidelines approved by the CDR Standing Forum and place for consideration to the Empowered group. c) The CDR Cell will have adequate No of staff deputed from banks and FI’s. The Cell might also take professional help. The cost in operating the CDR Mechanism including CDR cell will be met from the contribution of the financial institutions and the banks in the core group at the rate of Rs 50 lacs each and contribution from other institutions and banks @ Rs 5 lacs each.

Reference to CDR System: Reference to CDR system can be triggered by: Any one or more creditors who have minimum 20% share in either working capital or term finance By concerned corporate if supported by bank or financial institution having stake as in previous above.   Though flexibility is available whereby the creditors could either consider restructuring outside the purview of the CDR System or even initiate legal proceedings where warranted banks/FI’s should review all eligible cases where the exposure of the financial system is more than 100 Crores and decide about referring the case to CDR system.

Thank you…!!!