In the first quarter, while two cases were referred to us, we approved 10 cases pending from the previous year. In the second quarter, about 14 cases were referred and we managed to approve 19. In the third quarter, I expect lower referrals. But in the fourth quarter, the number may go up after RBI ends forbearance on restructured assets’ classification as standard
With the Reserve Bank of India’s forbearance on classification of restructured assets as standard ending in March, Corporate Debt Restructuring (CDR) cell chairman RK Bansal says referrals may go up in Q4FY15. In an interview with Shayan Ghosh, Bansal talks about failed CDR cases and how RBI’s new stressed asset guidelines have lowered the referrals. Excerpts:
Referrals to the CDR cell came down in the first half of FY15. What were the reasons?
In the first quarter, while two cases were referred to us, we approved 10 cases pending from the previous year. That happened because of the RBI’s JLF system. There was also a new concept of an independent evaluation committee (IEC) — even that took some time. In the second quarter, about 14 cases were referred to us and we managed to approve 19. In the third quarter, I expect lower referrals. But in the fourth quarter, the number may go up after RBI ends its forbearance on restructured assets’ classification as standard.
With some large cases failing in FY15, do you expect the trend to continue?
So far, we have approved 505 cases worth over Rs 3 lakh crore, of which about 144 failed, accounting for about 28% of the number of cases approved. However, this number may be misleading, as cases with relatively smaller amount have a greater tendency to fail. If we look at the quantum of the failure in absolute terms, it comes to around 13%. The failure was hardly 10% at the end of FY14, but the exit of three large cases in shipping, hotel and steel sectors suddenly changed the equation.
Even though there are different reasons for each case to fail, I do not agree with the view that the rate of failures has increased. What has happened is that due to exit of these three large accounts, unsuccessful exits as a part of approved cases have gone up. A successful exit from CDR can happen only after 7-8 years and you cannot really call those cases a failure that occur within two years of approval.
Most recast cases in the first half of this fiscal were in the range of Rs 1,000-1,500 crore. This was much smaller compared to previous years…
First, Rs 1,500 crore is not a small exposure. Secondly, there were only a few large cases last year. Actually, the normal size of CDR cases is between Rs 1,000 crore and Rs 2,000 crore. However, most of the EPC companies that came to CDR had slightly larger limits because of non-fund-based exposures. Most of the non-fund-based limits got converted into fund-based due to invocation of guarantees by some entities and letter of credit (LoC) devolvements, making the exposure larger. Therefore, if a company has Rs 2,000-crore fund-based limit and Rs 5,000-crore non-fund-based limit, the exposure will be counted as Rs 7,000 crore.
What kind of CDR approvals do you expect in FY15?
We certainly expect lesser number of approvals this year. Last year was the peak of approvals. So far this year, the figures are less, but we need to keep an eye on a few things. First, because of the new JLF system, which allows rectification of an account, banks are aware of stress in the cases at a much advanced stage and are able to take corrective action. Second, perhaps most companies that were required to come to CDR have already come. With the government taking policy decisions, things are likely to improve now and companies will be able to manage without restructuring. However, even after the RBI forbearance on classification of restructured assets ends in March, recasts will keep happening. This is because if you have to protect the value of an asset, there is no other way than restructuring in our system. The option of recovery is not an option at all since the legal system takes too long.