The government is set to carry out a performance review of companies that have opted for corporate debt restructuring (CDR). This follows various steps taken to curtail the virtually unchecked flow of CDR cases.
There has been concern on the growing number of companies opting for a debt recast. The Reserve Bank of India (RBI) had implemented strict norms to ensure only genuine units took this route. However, the performances and operations of companies in the CDR cell are often overlooked. Many of these have been under CDR protection for years, without any incentive to move out.
Rajiv Takru, secretary, Department of Financial Services, said the first step would be to block the flow of the huge number to companies to the CDR platform. A detailed review of existing cases would be next. “There is a thought to scrutinise each case (and the respective company’s performance) which is under the CDR package,” Takru told Business Standard. The details of the timeframe and the mode of review are yet to be worked out.
Takru’s message comes just two days after Reserve Bank of India Governor Raghuram Rajan sent a strong message to company promoters in his first media conference. Rajan said promoters did not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalise their failed ventures. He has also asked Deputy Governor K C Chakrabarty to take a close look at the restructuring and recovery process and said next steps would be taken shortly.
Debt restructuring is a tool to offer aid to borrowers in distress, owing to circumstances beyond the borrower’s control such as a general downturn in the economy or a sector. It might also be warranted by legal or other issues that cause delays, particularly in cases of project implementation.
As of June, lenders had approved CDR packages for 415 companies, with aggregate debt of Rs 2,50,279 crore. The iron and steel sector accounted for the most — Rs 53,543 crore. A year earlier, 309 cases, with aggregate debt of Rs 1,68,472 crore, were on the CDR platform.
The extraordinary rise in cases referred to and reworked under CDR led to questions whether the trend was due to the general downturn or a gross misuse of the facility by banks and companies.
An IDBI bank official said the government’s move to carry out an analysis was constructive. “It has to bring lenders on board for the review. This will also send a signal that CDR support is not available for perpetuity.”
According to an RBI analysis carried out before the strict recast norms were announced, the rise in references to CDR could be partly due to excessive leveraging by a few borrowers during the economic boom. There were deficiencies in project appraisals conducted for cash-flow analyses and determination of the date of completion of projects.
When commercial operations were delayed, a host of factors, including uncertainties surrounding a project, were cited as reasons.
But in the case of uncertainties, these had to be accounted for during the appraisal of the project and a proper cushion had to be built to take care of these uncertainties, RBI said.
An investment banker said there was room to improve the system to monitor entities after restructuring. Those involved in advising recast (such as State Bank of India Capital Markets and IDBI Capital) had to be held accountable for the fate of companies, the banker added.
The move seems to be aimed at appraising projects, keeping in mind aggressive repayment schedules. RBI had earlier said this led to a short-term focus by borrowers, banks and financial analysts and created the need for successive restructuring.