Given that recast through the corporate debt restructuring (CDR) mechanism takes 8-9 nine months to fructify, banks are increasingly opting for ?soft restructuring?, a senior bank official told FE.
?CDR takes too long whereas soft restructuring, or tweaking the loan conditions, can be done much faster. We are increasingly preferring these as a lot of borrowers have receivables pending from the government and we want to give them a breather,? said a senior public sector bank official.
The official added that the new practice has been put to use for infrastructure assets in Andhra Pradesh after the creation of the Telangana state. ?Borrowers who had executed projects in undivided Andhra Pradesh are yet to receive their payments from the government in the state after the division,? the banker added.
Soft restructuring consists of tweaking certain loan terms like allowing a 2-3 month leeway to the borrower to pay the interest and sanctioning some extra funds to the stressed company. The company is also, at times, told to hive off some non-core assets to be able to repay the add-on loan.
This process, the banker said, can take place either during the SMA-1 period ? relating to accounts where interest payments are overdue for 31-60 days ? or during the SMA-2 period, when interest is overdue for 61-90 days.
?Many borrowers who have executed government projects are yet to receive their dues and are, in turn, delaying interest payments to us. This is being implemented as a temporary solution as we believe these companies will be back on track once the government starts repaying dues,? the official quoted above said.
With bankers adopting the soft-restructuring approach, there has been a decrease in CDR referrals in the first quarter of FY15. The number of cases referred to the CDR cell fell in the June 2014 quarter with only two cases referred against 28 in the same period last year. The amount of loans referred in Q1FY15 stood at R2,720 crore compared to R39,521 crore in the year-ago period.
According to an executive director at another Mumbai-based public sector bank, historically, CDR referrals have been highest in the last two quarters of a financial year.
For CDR cases, lenders provide an interest moratorium of two years, along with a 200-300 bps reduction in the rate, apart from additional funds to the borrower, the quantum of which differs from case to case.
Data from the CDR cell show that as on March 31, 2014, infrastructure constitutes 20.7% of the total live CDR cases, amounting to R57,233 crore.
The RBI, in December last year, had published guidelines for early detection of stressed assets, which said that if the Joint Lender Forum (JLF) decides on restructuring the account as a Corrective Action Plan (CAP), it will refer the account to the CDR cell for restructuring after preliminary viability study.
Corporate debt restructuring is a mechanism that works on the principle of approvals by the super-majority of 75% creditors (by value), which makes it binding on the remaining 25% to agree to the majority decision and covers only multiple banking accounts and consortium accounts with exposure of R10 crore and above.