Web analysis: Tighter norms for firms seeking debt revamp

Bankers call on them to hike equity infusion to 25% of CDR demand

Some of the top bankers in country met to discuss the changes in corporate debt restructuring (CDR). The outcome of the meeting was a further tightening of guidelines and stricter controls.

Bankers want promoters of companies approaching the CDR cell to increase equity infusion to nearly one-fourth of the CDR demand. As a company under the CDR system gets preferential treatment, bankers are looking at a timeline for exits of these companies. Further, they are seeking board representation, conversion of debt to equity, management changes, personal guarantees and higher interest rate of not less than the base rate.

The above mentioned guidelines are clear that bankers do not want companies to approach the CDR cell. A corporate prefers approaching the CDR cell if it has taken loan from more than one bank. As it becomes difficult to re-negotiate with each bank individually the CDR cell works as a common platform. Cases are taken to the CDR cell if the company believes that revival of its fortune will take a long time.

Banks themselves have a restructuring cell, which handles each case referred to it internally. Only the bigger cases where the corporate has used a consortium of banks for its funding are passed on to the CDR cell. These too, are referred after the banks find it difficult to settle at their individual levels.

Among the proposals, personal guarantee is the biggest disincentive for a promoter to refer his company to the CDR cell. Giving personal guarantees exposes the promoter to be liable for default. Very few Indian promoters would like to stick their neck out.

Change of management is also a dampener for approaching the cell.

Bankers have given a clear signal that they do not want corporate's to rush to the CDR cell, and if they do there will be a cost which could be higher than original cost of restructuring.

Bankers have realised that they will have to act tough after cases approaching the CDR cell shot up to Rs 206,493 crore in 2011-12 as compared to Rs 138,604 crore. H S Upendra Kamath, chairman of Vijaya Bank said in an interview on CNBC that he believes CDR cases, references and finally implemented cases are bound to go up. The whole system is under stress and these problems have a tendency to surface with a lag effect. Therefore, whatever references thus far made in my personal view are bound to go up.

Banks will need to continue to act tough to prevent the deluge of cases approaching the cell.