The Rot Called Corporate Debt Re-structuring

The government has sanctioned fresh capital for public sector banks. Will this capital too leak out into bad loans and be dumped into the opaque and another corrupt process called CDR?


The government of India has just announced a fresh round of capital infusion to keep unaccountable and corrupt Public Sector Banks (PSBs) alive. The money will come from taxpayers' pockets, as has happened in the past.


Exactly as in the past, no accountability has been imposed on the banks in return for the capital infusion. The Ministry of Finance and Reserve Bank of India (RBI) never pause to think that well-run private sector banks working within the same economic system do not need capital the way PSBs do. Why do the PSBs need all this money at regular intervals? Where is all this capital going?


PSBs need regular infusion of capital because they lose tens of thousands of crores in bad loans, for which PSBs are not even held accountable. Indeed, a lot of the bad loans land up in another corrupt and opaque mechanism called Corporate Debt Restructuring (CDR), run under the auspices of the so-called banking regulator, RBI. There is no tracking of what happens to restructured loans. This absolves the banks from any accountability.


If the Finance Ministry is interested in tracing where the capital is leaking out to and or in estimating the extent of rot in PSBs, it should investigate CDRs on priority. It will discover that CDR allows for artificially favourable asset classifications in the accounts admitted under CDR, which are otherwise bad loans.


This misreporting through falsely favourable artificial asset classification, without making the CDR cell accountable, has encouraged banks to push their massive bad loans into CDR. This has severely compromised the basic reason for which the CDR cell was established.


How widespread is the menace? A typical public sector bank has around 35% of its advances to large and mid-size corporates. Surprisingly, a large portion of this part of the credit book is being referred to CDR, which involves loans where for a two-year period there has been no income, then fresh loans are granted at a concessional pricing at 11%-12% p.a.


This portfolio gives returns, which are far lower than the risk-adjusted cost of capital of most banks. How much are banks giving up on their income under this dubious RBI-managed restructuring process? Unfortunately, bank-wise restructured portfolio data is not available in the public domain.


But those who have been involved with CDR say that “about 60% of loans to large and mid-sized corporates have been/are being restructured either bilaterally or under the CDR scheme. Thus, around 21% (60% of 35% of total loan book) of an otherwise high returns loan book is giving returns which reduces the value of business, i.e. gives a return which is lower than the cost of capital.”


Remember, agricultural loans contribute 18% of the loan book and are also lent at concessional rates, hence earn returns that are lower than the cost of capital. Therefore, adding the restructured loans (21%) and agricultural loans (18%), nearly 38% of the total loan book provides lower returns than the cost of capital.


While agricultural loans are a part of priority sector obligation, their proportion of the restructured loan book is ever increasing and at times even difficult to predict, as banks rush to use CDR as a means for hiding and kicking bad loans down the road.


Unfortunately, unless someone from the Modi government steps in and starts asking tough questions, this burgeoning restructured portfolio is likely to come in the way of sensible banking and monetary policy.


Interestingly, senior RBI officials have often mentioned that banks are indulging in evergreening of loans, (according to former Deputy Governor Dr KC Chakrabarty) as well as “putting lipstick to pigs” (according to Governor Dr. Raghuram Rajan) i.e. they are restructuring loans which really are not viable. But nobody seems to be bothered that this evergreening and beautification is happening right inside the RBI's CDR cell!


  1. Nobody also seems to bothered by the fallout of the way bad loans are being kicked down the road

  2. The Opportunity cost which has to be borne by everyone in the economy by way of higher priced loans

  3. Income tax paid by honest tax payers being deployed in providing more capital to banks to support bad loans.

  4. Reduced availability of credit to various sectors in the economy with small businesses being the biggest losers.

  5. Impact on monetary policy transmission.

  6. Undermining the “real” capital adequacy of PSBs, creating risk of financial instability.


Apart from the fact that the RBI is colluding with banks in dumping bad loans into the CDR system, it does not audit CDRs and has flawed benchmarks to assess its efficiency.


CDR’s efficiency is based on the number of days in which CDR is implemented. In fact, the CDR cell has a target of restructuring loans and thus, everyone in the decision making has a vested interest in seeing that CDR is implemented anyhow.


However, a very important criterion of “being efficient” is absent; i.e. deciding whether the loan facility really deserves restructuring or not? It would be more useful to recognise, say five deserving cases for CDR and restructuring them in one year, rather than restructuring 25 cases in 90 days, out of which 20 cases merely amount to applying “lipstick to the pig”. Any audit of the fate of restructured loans will open a can of worms. But is the Ministry of Finance, which needed to use the PSBs to make a success out of the Prime Minister’s pet project, Jan Dhan Yojana, really interested in finding out?




2 years ago

In a recent media report, the RBI chief has, n a manner of letting the cat out of the bag, voiced his concern that the culture of loan waivers must end. His viewpoints are seen to have been well made, with unbiased outlook.

To add a couple of more (for a serious look into):

1. The ongoing unbridled practice of , 'bailing out' - with no regard to the flip side namely, potential impact /adverse effect on the lawful rights and interests of the stakeholders- e.g. 'depositors' whose monies are siphoned off for such purpose.

2. The standard provisioning permitted, as a routine minimum for tax deduction, under the income-tax law, for 'bad and doubtful debts' , with no other criterion/or checks and balances, in place / to apply; which, in the ultimate analysis, has the obvious potential to breed other 'evils', such as corrupt practices in lending.

Besides,going by one’s quick but limited understanding, the primary /upfront responsibility to recover lies with the lending banks. Yes! Attachment of the property given as security by the borrower is, perhaps, the ultimate recourse. But then, that is going to essentially depend upon the quality /adequacy, in legal terms, of the security so given and accepted by the lender,- which, more often than not is done without , albeit a must, a mindful scrutiny and diligent investigation. For instance, just as others, ‘home loans’ if so given, - mostly impulsively, without a proper and intelligent scrutiny, so also expert vetting of the supporting documentation offered by borrowers,- on the security of the property of special kind known as, Flats or Apartments, for reasons known or ought to been known through wisdom to be gathered from past experience, are bound to be confronted with insoluble /irresolute mind -teasing legal problems/hurdles. This is an area in which it is for the Regulator to be of effective guidance, as so required through binding directives, to its constituents, to guard against possible disputes, ending up in infructuous court litigation (civil /criminal).
As may be readily imagined, RBI cannot, if so minded, fail to locate such instances from the open book of settled or unsettled ongoing court cases.


2 years ago

Do not expect this Govt to change this. Modi is an administrator, not a reformer. He will work on other improvements from the Congress regime and there is lots he will do, but expecting him to clean the public sector is a pipe dream. He loves the public sector (just see the Gujarat example of last 12 years). He will continue to pump money into this sinkhole.

The ONLY solution to this problem is to privatize. That is the only way to bring in accountability. As long as PSU bankers know that their salary and promotions and perks have no correlation with their work, they will continue to create CDRs and NPAs for filling their personal pockets. Any idiot with no financial common sense can also see why every PSU bank has NPA + restructured loans of > 10%, whereas private bank average is 3-4% and foreign bank average is below 1%.

Why does this country need to have 25-30 public sector banks?

Why does RBI allow banks a "one-time" dispensation every 5 years to restructure loans even without calling it restructured or CDR. What we see as restructured or CDR are actually 2nd leg of the problem. These crook borrowers have already benefited once through the restructuring before they get the CDR label.

The best part is that RBI guidelines, yes, RBI guidelines require that when a company goes to restructuring, none of its banks can refuse to lend more money!!! Amazing, isn't it? So if we have another Kingfisher airline tomorrow where one stupid bank is willing to sink in more money, RBI will force the other banks to do so. God help the depositor's savings in these banks and the equityholder's equity.

Jai Hind... this happens only in India


2 years ago

Once upon pole 'HEAD-LINES' were LESS COMMERCIAL BUSINESS and more GOVERNANCE,where have gone AUTHENTICITY of ?

Mahesh S Bhatt

2 years ago

Honest Pays for Rich dishonest Industrialist/Crony Capitalism drowned American Financial system & we /world is following the way more fast/dangerously.Mahesh

Rajan RG

2 years ago

I think Modi & team forgets why people has given a stable verdict for them. The expectation is the new govt should not repeat the congress govt mistakes but these people are just continuing the legacy of the congress. I thought this govt will be helpful for future generation of Indians. I lost the hope now.

Rajan RG

2 years ago

I think Modi & team forgets why people has given a stable verdict for them. The expectation is the new govt should not repeat the congress govt mistakes but these people are just continuing the legacy of the congress. I thought this govt will be helpful for future generation of Indians. I lost the hope now.

AirAsia and Air Costa join IndiGo Air profit league - others in the red

IndiGo going steady as smaller newcomers turn profits, other airlines still plagued by cumulative losses.


Due to the extremely competitive fare structures offered by bus operators and Indian Railways, AirAsia is making losses on its Bangalore-Chennai run. However, on the other four routes that it operates, it is making a profit. This was disclosed by Mittu Chandilya, CEO of AirAsia, on the sidelines of the SITA India Aviation Forum recently.


AirAsia, the low cost, no frills carrier, has two flights daily from Bangalore to Goa and covers Cochin, Jaipur and Chandigarh, and all these routes are in profit. Air Asia expects to announce two new routes and the service is expected to begin in November.


According to Mittu Chandilya, they plan to induct 10 more aircraft next year, taking the total fleet to 15, it currently operates 2 Airbus A-320s. Originally, they had planned to cover only tier II and tier III towns and cities, but due to intense competition, they may break ground to cover wider territory. New Delhi is most likely to be the next airport they will look to cover. Details are expected shortly.


While IndiGo has been making waves this year, they have already declared a profit for the year ending March 2014, which is the 6th continuous year of profits. They have plans to embark on a mammoth expansion plan, thanks to the $ 2.6 billion finance from the Industrial and Commercial Bank of China, for purchasing 30 aircraft.


Air Costa, which has been operating from Andhra Pradesh for almost a year now, has started posting profits since a few months and expects to post a net profit at the end of the current financial year, according to its Chairman, Ramesh Lingamaneni. It has been reported in the press that they have an average passenger load factor of 71% and utilization was 9.5 hours a day. For Embraer E-170s 78-seater, it was 7 hours and for E 190s, 112-seater, the utilisation was 14.5 hours, according to press reports. Soon, they plan to set up MRO - maintenance, repair and overhaul facilities.


Air Costa has ambitious plans on the anvil. They have applied to DGCA for going national, and shed their regional tag, besides going in for international routes. However, the present 5/20 rule may be an obstacle, which the existing older domestic counterparts do not want withdrawn or waived.


In the meantime, Air Costa has entered into a MOU with Viet Jet, the 2nd largest private airline in Vietnam, "for exploring future opportunities of working together, covering code sharing, partnership and financial collaborations." This was done during Vietnamese Premier Ngyugen Tan Dung's visit to India, a couple of days ago.


Both Jet Airways and SpiceJet have reported losses recently. Although Jet Airways received $900 million from Etihad Airways, they would need more funds to keep afloat. It may be recalled that Etihad bought a 24% minority stake in Jet Airways in November 2013, but with the endless fare wars that these airlines have got into, it is unlikely that they will see profits in the near future. On the top of these, their advance booking for various aircraft would become an additional burden when they arrive unless they are able to secure great increase in the passenger load.


Meantime, Minister Ashok Gajapathi Raju has been able to get the tax on aviation turbine fuel reduced in some states, but uniformity at a national level has not been achieved. Additionally, high airport charges at metros are a damper, but like Air Asia has now changed its mind, others may decide to fly in and out of metros.


(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)



Sanjay Sinvhal

2 years ago

My indigo flight for Jan'15 has been rescheduled. When I called Indigo to find put the options for refund or change to an alternate flight, I was told to read the fine print. It reads as below. So Airlines now can change their schedule by upto 3 hrs with no recourse to PAX. My Spicejet flight Mum-Del also got preponed from 0930am to 0730am but I have no option but to reach my destination 2 hrs before & wait for my connection.
Is this fair? Is this not a one sided rule which SC recently said is untenable in law (refering to real estate agreements).
Why AIrlines can't offer the same option to their PAX who are already booked with them & airline is earning interest on their advance bookings?
Pl take this with DGCA & amend this draconian rule.

Indigo T&C :
Flight Delays or Cancellations:
At any time after a Booking has been made, we may change our schedules and/or cancel, terminate, divert, postpone, reschedule or delay any flight where we reasonably consider this to be justified by circumstances beyond our control, or for reasons of safety, or for commercial reasons. Circumstances beyond IndiGo's control can include, without limitation, weather, air traffic control, mechanical failures, acts of terrorism, acts of nature, force majeure, strikes, riots, wars, hostilities, disturbances, governmental regulations, orders, demands or requirements, shortages of critical manpower, parts or materials, labour unrest etc. If an IndiGo flight is cancelled, rescheduled or delayed for more than three hours (depending on the length of the journey), a Customer shall have to right to choose a refund; or a credit for future travel on IndiGo; or re-booking onto an alternative IndiGo flight at no additional cost (subject to availability); subject to the requirements under the local laws of the country in which the flight has been cancelled, rescheduled or delayed.
In the special case in which a subsequent portion of an IndiGo flight is cancelled while a Customer is already in transit, such Customer shall have the right to choose to remain at the transit station and to be re-booked onto an alternative IndiGo flight to the final destination at no additional cost subject to availability; or to remain at the transit station and accept a partial refund for the portion of the flight not completed; or to return to the point of origin and receive a refund; or a credit for future travel on IndiGo; or re-booking onto an alternative IndiGo flight at no additional cost subject to availability. We strongly recommend all Customers to provide correct phone and email address, to enable us to inform of flight delays or cancellations in unforeseen cases. Customers who have not provided valid contact information at the time of Booking may not be entitled for any compensation. Contact our call centre (0) 99 10 38 38 38 or +91 124 6613838 if you have any queries.

Government announces austerity measures to cut expenditure
The Finance Ministry issued a statement pushing for a 10% cut in non-plan expenditure in order to maintain fiscal discipline in line with budgeted aims
The Government, on Thursday, announced directions to its own bureaucrats and departments, to cut spending and unnecessary expenses in a bid to push austerity. The Finance Ministry said that it was aiming to cut non-plan expenditure by 10%. 
The statement of the Finance Ministry said that the 10% cut would be mandatory for all ministries and departments. 
The Finance Ministry said that it "strongly discourages" holding seminars abroad, other than for exhibitions for trade promotion. The Ministry also banned holding meetings in five-star hotels, unless these meetings were held at the level of the Minister-in-charge or Administrative Secretary, and the meeting was with foreign governments or international bodies of which India was a member.
The Ministry explicitly said that keeping in mind the budgetary cuts mandated in the statement, there would nonetheless "be no bookings in First Class." The Finance Ministry further banned the creation of any new Plan and Non-Plan posts. 


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