At a time when the flow of corporate loans heading for recast is surging, two financial services entities — DCB Bank and IFCI — have opted to exit from the Corporate Debt Restructuring (CDR) forum.
They cite exposure to fewer CDR cases and changes in their business model, as the reason for this.
Bharat Sampat, chief executive officer, DCB, said the bank was focusing on micro, small and medium enterprises and did not have large corporate accounts. The CDR deals with cases having exposure above Rs 10 crore.
DCB’s portfolio of restructured portfolios is small (Rs 10 crore). Small and medium enterprises face liquidity or cash flow pressures but the bank has not seen mass delinquencies so far. They were careful in underwriting credit, he said.
The stretched economic slowdown and the effect of high input and interest costs continues to drive companies for debt recast in droves. The amount of loans referred to CDR grew almost four fold to Rs 19,500 crore in April-June 2012 from Rs 4,680 crore in the same quarter of 2011-12.
An official in the CDR cell said IFCI, a Delhi-based financial company, had changed its business model. It is active more on the short-term funding side. Most CDR exposure (of lenders) pertains to the long term. Hence, it decided to move out.
The restructuring in many cases involves a cut in interest rates and an extended repayment period. For some financial sector entities, the cost of funds is high, as they depend on the market as against public deposits, relatively cheap sources of funds. This makes it difficult for them to agree for a hit on interest income.
Atul Kumar Rai, managing director of IFCI, said the cost of finance was high for them, 2.5-3 per cent higher than other CDR members, most of whom are banks, with the advantage of low-cost deposits.
IFCI has exclusive securities for loans. In restructuring at CDR, where the terms of reference are common for lenders, the strength of securities (for IFCI) might become weak. Keeping these two aspects in mind, IFCI decided to move out of the CDR forum, Rai said.
On the outlook for restructuring, the CEO said: “We are looking at a far more adverse environment. There could be an effect on cash flows of corporates.
When companiesunits are not able to realise projected cash flows for no fault of theirs, they will look for renegotiating terms.”
