CDR mechanism to be restructured

ANNUAL POLICY 2005-06/ STRUCTURAL ISSUES & CREDIT DELIVERY

The Reserve Bank of India has decided after a review to make changes in the corporate debt restructuring (CDR) mechanism. The changes would be with regard to the minimum exposure and number of lenders needed for sanctioning a CDR package.

RBI has also decided to rationalise regulatory concessions given for debt restructuring.

The applicability of the existing instructions on asset classification for the first restructuring of debt would also be revised. The allowance of an exit option from CDR mechanism through a one-time settlement is also to be changed.

RBI said a draft circular proposing changes in the CDR mechanism will be put in the public domain for wider dissemination before taking final decisions.

The main issue troubling the CDR mechanism was foreign banks' refusal to join it. Foreign banks, being minority lenders having large exposures in the form of working capital advances, have been complaining that Indian banks would force on them to debt restructuring packages on the strength of their large exposures.

The current CDR guidelines require lenders with a minimum 75 per cent of exposures to agree for approval of a restructuring package.

Foreign banks have been demanding that a restructuring package be considered approved if the majority of the lenders agree on it and not on the basis of the lenders' exposure. Or else, they wanted to have an exit option in the CDR mechanism if a restructuring was not to their liking.

RBI has also constituted a working group on conflicts of interest in the Indian financial services sector, headed by HDFC Standard Life Insurance managing director D M Satwalekar.

RBI said the group is expected to submit its report by July 2005. The report would be put in the public domain for wider dissemination before recommending for adoption.

What's on the cards

• Changes would be with regard to minimum exposure and number of lenders needed for sanctioning a CDR package.
• RBI has also decided to rationalise regulatory concessions given for debt restructuring.
• Applicability of the existing instructions on asset classification for the first restructuring of debt would also be revised.