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| More companies take recourse to corporate debt restructuring |
| Abhijit Lele / Mumbai Apr 24, 2009, 00:10 IST |
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The sharp economic downturn and liquidity crunch, especially since October 2008, put enormous strain on the financial health of Indian companies.
While the level of non-performing assets for banks is on the rise, despite the Reserve Bank of India’s push for debt restructuring, cases referred to the corporate debt restructuring cell increased to 34 at the end of March 2009, as against 10 at the end of 2007-08.
CDR, which was set up in 2002-03, is a mechanism for faster disposal of restructuring cases involving multiple lenders, though foreign banks are yet to join the platform. Some Indian players such as IndusInd Bank also walked during the boom years when delinquencies were lower.
Sources involved with the CDR set up told Business Standard that of the 34 cases, 14 were textile companies, while another half-a-dozen cases related to the steel sector. Besides, there are auto part manufacturers and Subhiksha, a retailer. The sources also said that Wockhardt, which sought a reference to CDR through ICICI Bank, may also come up for consideration over the next few weeks.
Lenders said that since many of the companies are unable to deal with the high level of debt, there would be more cases that would be coming to the CDR mechanism over the next six to nine months.
A senior public sector bank official said that CDR was a proactive step to avoid company slipping into mess where it may become difficult to make any recovery.
During the fourth quarter the troubled retail store chain Subhiksha was also referred to CDR. This was probably the first instance of a retailer being referred to the CDR mechanism after it reported its first quarterly loss and expressed its inability to clear dues to employees and property owners. While lenders try to dispose cases within 90 days, Subhikha is likely to take longer as an investigative audit has been ordered and some of the lenders are also seeking liquidiation of the company.
In August 2008 The Reserve Bank of India (RBI) had revamped the norms for restructuring advances, including non-industrial credit. Now, the non-industrial companies can also use of CDR mechanism, a clause that was used by the lenders to Subhiksha.
Referring to array of options that are used to help cases, a bank executive said that lenders would consider increasing the repayment period and convert a part of debt into convertible instruments as part of the restructuring process under CDR.
“In an extreme situation, we can take a haircut and change the management where we find that present set of people are not able to make a turnaround,” he added. RBI’s revised norms harmonise the prudential norms across all debt restructuring mechanisms. Since the principles underlying the restructuring of all advances are identical, the prudential regulations too need to be aligned in all cases.
While banks work on cases with the hope of recovery, rating agencies consider cases referred for restructuring as weak assets. “The analysis of previous cases shows that many restructured cases turn into a bad assets over period”, a official with large rating agency.
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