Foreign, private banks seek indemnity over CDR losses

A section of the foreign and private sector banks have sought changes in the Reserve Bank of India (RBI) formulated corporate debt restructuring (CDR) scheme.

These banks want an indemnity provision to be incorporated in the scheme so that they are compensated for the losses incurred due to the decisions taken by the majority lenders. This is because they felt that public sector banks are calling the shots at the CDR cell.

Under the CDR scheme, if 75 per cent of the consortium lenders by value agree on restructuring a debtor, then the decision becomes binding on the remaining consortium lenders. The minority lenders said that there is no scope for dissent in the CDR mechanism.

They simply have to go along with whatever decision is taken by the majority lenders "" public sector banks, all India financial institutions and big private sector banks "" in a consortium.

"If majority lenders (by value), as part of the debt restructuring process, decide on extending fresh credit to a debtor (so that it can continue its operations), then the minority lenders, even if they do not want to increase their exposure, have to fall in line. The minority lenders neither have a voice nor can they wriggle out. Hence, we are seeking the indemnity provision," said a senior banker clued in to the development.

The reluctance of foreign banks and some private sector banks to participate in the CDR mechanism stems from the fact that they have to enter into a legally binding inter creditor agreement with necessary enforcement and penal clauses.

The banks are also pushing for separate super majority for working capital and term lending. At present, aggregate lending (working capital plus term loan) of banks and financial institutions is taken into account for arriving at the 75 per cent by value criteria for agreeing on CDR.

Further, they felt that the chairman of the CDR empowered group should have a casting vote in case of a tie in the decision making. The empowered group consists of senior representatives of IDBI, ICICI Bank and State Bank as standing members and other financial institutions and banks which have an exposure to the concerned company.