RBI begins CDR scheme reveiw

The corporate debt restructuring (CDR) scheme is under review for a possible tightening.

According to banking industry sources, the Reserve Bank of India is reviewing the scheme to make it more participative. Moreover, borrowers are likely to have greater accountability.

Sources said, in order to help small banks that are lenders in big consortiums, the RBI is likely to come out with a consensus approach for settling the restructuring mechanism.

At present, if a proposal gets ratified by 75 per cent of the lenders (in value terms), the entire consortium goes by the plan even if the smaller banks are not satisfied with the terms of the settlement. The revised policy may see a consensus approach for working out the restructuring proposal.

There are a string of proposals being considered to make borrowers more accountable.

These include making it mandatory for borrowers to pledge promoters' shares with the banks, bring in their share of funds within the due date, and sticking to the restructuring schedule.

Banks, wary of turning an account into a NPA, engage in evergreening the account by transferring it into other branches or subsidiaries. The corporate borrower takes advantage of this and delays on its commitment to the restructuring schedule.

Sources said, the RBI is of the view that once an account becomes an NPA, it is legally binding on the corporate to bring in its proceeds as recovery proceedings could be driven legally. On the other hand, once an account turns into NPA, the corporate stands to lose its credit worthiness to borrow elsewhere.

CDR was announced as a policy statement by the finance minister in 2000-01.

The RBI, in August 2001, advised banks and financial institutions to implement the system.

The system had been worked out with the objective of ensuring timely and transparent restructuring of corporate debts. The system will pertain to those corporate accounts which are viable but have been struck with uncertainties of business cycles.

The settlement will out of the purview of BIFR, Debt Recovery Tribunals (DRTs) and willful defaulters' list.

CDR is a non-statutory voluntary mechanism based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA).

It will cover only multiple accounts managed by syndication or consortium of accounts with outstanding exposure of Rs 2 crore and above and are still classified under standard and sub-standard accounts.