It is rightly said that anyone borrowing a few lakhs has to worry but it is the bank that has to worry when it has lent crores! This is the concluding part of a two part series

Corporate debt restructuring arrives
 

The boom having come to an abrupt end, the focus shifted to increase in numbers of bad loans or distressed assets by ushering in an era of corporate debt restructuring (CDR) giving it new name greening of loans to recognise impairment by allowing the reorganisation of outstanding debt obligations entailing modification of contractual terms to provide for concessions in interest and/ or principal or extension in maturity period to bring about reductions in debt burden to increase the ability of the borrower to meet debt obligations; with the lending banker having to waive or forgive or convert a part of debt into equity.
 

Initially the Cell was expected to deal with companies facing financial difficulties owing to conditions beyond their control and/ or internal reasons essentially demand downturn, rise in raw material costs, policy bottlenecks like cost over-runs arising out of delays in land acquisition, forest, environment resettlement and rehabilitation clearances. The Cell was also expected to seek ways and means to access alternate or cheaper sources of raw material, harnessing better technology to bring down manufacturing costs, tap new markets and ultimately revive their fortunes in order to accelerate repayments. It essentially envisaged the revival of institutional borrowers facing financial difficulties by ensuring safety of the money advanced by lenders by way of timely support through restructuring of debts by a mix, including waiver of interest and penalties, rescheduling the tenure, conversion of working capital finance into term loans, standby and supplier credit, conversion of debt into equity and other modes to soften the burden of the individual institutions or syndications or consortiums.
 

A report on 6 October 2013 says there is no let-up in requests for CDR essentially out of economic downturn, slack demand, policy logjam, delays in statutory approvals, forest/ environment clearance, land acquisition, fuel shortage coming in the way of project implementation making debt servicing impossible for the borrowers. Between April-September 2013, the CDR Cell received 59 applications as against 74 during the same period in 2012. However, the quantum of debt increased 63.5% to Rs64,500 crore compared with Rs39,435 crore a year ago period.
 

The sharp jump by over a third in the number of bank borrowers queuing up for debt recast has prompted ministry of finance (MOF) and Reserve Bank of India (RBI) to consider calling on ‘external experts’ to ‘bring fresh perspective’. This zeroing in only on experts from public sector and possibly technocrats from major sectors like steel, power, roads and textiles calls for a rethinking. These technocrats as ‘experts’ may be in a better position to advice on manufacturing and marketing aspects. However, it must be remembered that these technocrats may not be in a position to identify and to pinpoint the root cause of the illnesses like diversion and/ or siphoning off of funds, bad financial planning, mismanagement and frauds perpetrated by wilful defaulter-promoter/ borrowers. This calls for more of forensic accounting/ auditing skills that only veterans in the banking and auditing areas can bring out by identifying more precisely the misdemeanours. The genuine financial experts should be called in first before inviting other non-financial technical ‘experts’. Those with the requisite expertise can take immediate possession of assets to distribute them to stakeholders and creditors as is the practice in other countries.
 

While the schemes envisaged sacrifice on the part of the borrower. It requires them to bring in additional contributions by way of increased margins it has been noticed that the wrong type have sought to grossly abuse the scheme by first availing of the benefits and then reneging on their commitments. It is these dubious players that are primarily responsible for their woes has they had misused the initial monies from initial public offerings (IPOs) as well as term and working capital borrowing all by directing them elsewhere for personal gains.
 

The numbers of borrowers lined up for debt restructuring has witnessed a substantial jump over the last year:
 

“An assessment of the impact of the liquidity contagion in the Indian banking system indicates that the failure of the large lenders in the system could have a significant downstream impact on the liquidity in the system and could also cause a few other banks, in turn, to be liquidated.” One only hopes it doesn’t take Indian banking system the Greek way!
 

On 30 May 2013, the RBI, in the first step in clamping down on unbridled restructuring of loans by banks increased the provisioning requirements for fresh standard restructured advances to 5% from 2.5% and for the existing stock, it will be phased over three years. Having learnt the hard way, the RBI has directed banks that promoters of the restructured company must bring in at least 20% of the amount sacrificed by the bank by way of repayment loss or 2% of the total restructured debt, whichever is higher. Also banks have been cautioned against taking corporate guarantees instead of promoters’ personal guarantees.
 

Deputy Governor Dr KC Chakrabarty
 

Speaking at a seminar on CDR, RBI Deputy Governor, Dr KC Chakrabarty, has rightly blamed commercial banks for being biased in favouring only loans of privileged large corporate borrowers to the detriment of much smaller home, consumer, vehicle and personal loans extended to individuals and SMEs, who face the brunt of bank attachments. Lenders are loath to act against large borrowers because they face large legal hurdles like court stays. The smaller borrowers lack the capacity and are forced to meekly concede to the attachment even when the loans could possibly have been restructured with minimal sacrifices. It is rightly said that anyone borrowing a few lakhs has to worry but it is the bank that has to worry when it has leant crores! 
 

Dr Chakrabarty says 20% of the restructure loans turn non-performing assets (NPAs), though not all of them result in loan losses. He said that banks must help out when the borrowers face crisis due to external factors. He rightly questioned the attitude of top honchos of restructure applicants – “Are you taking a pay cut or making use of public transport?” According to him, the lenders must insist that promoters infuse substantial equity upfront before the exercise that ought to be necessarily completed within 90 days.
 

Later on at an ASSOCAM meet in November 2012, Dr Chakrabarty rightly lamented – “The corporate sector is responsible for a major part of the rising bad loans causing inconvenience to honest borrowers… NPA is a creation of the corporate sector... You borrow from banks and you do not repay them in time.” He has not spoken on the steps to curb this malaise. He reiterated this lament again at Chennai end December 2012, during the release of a book ‘Indian banking reforms and after.’
 

Recent reported CDR cases
 

Kingfisher Airlines, Bengaluru
 

This is a case of everything gone wrong from the word go – from enhancing all kinds of borrowing limits on dubious collaterals like brand name, unenforceable  group company guarantees, pledge of shares of associate companies, converting the debt into dud equity at inflated values et al. The chairman and managing director (CMD) of State Bank of India (SBI), the lead bank heading a consortium of 17 banks with an exposure of over Rs7,000 crore with the securities SBI is expected to realize only 25%, has this to say now – “We are blazing all guns and taking all steps to recover loans.” Nothing seems to be happening at ground zero!
 

Lanco Infratech Ltd, Hyderabad
 

On 11 December 2013, a consortium of 27 lenders headed by the IDBI Bank cleared an Rs7,000 crore CDR package to release Rs3, 500 crore as working capital advance to enable it to resume engineering, procurement and constructions operations. Of this Rs2,500 crore will be fund based.     
 

Wockhardt Ltd, Mumbai
 

One of the earliest CDR models is the Wockhardt recovery package that made the company ‘an inspiring comeback story from being the most visible victim of uncertain times for a company that had over-stretched itself with a spate of overseas buys’. With more than half of its sales coming from exports, currency fluctuations hit the company hardest, adverse global market conditions, liquidity constraints, it defaulted on repayment of $110 million foreign currency convertible bonds (FCCBs) and was faced with a winding up petition. With debts of over Rs3,800 crore in 2008, it sought the CDR mechanism offered by its bankers’ for Rs1,400 crore. The debts included $250 million EU debts, restructured for repayments during 2013 to 2015, Euro 88 million of French debts telescoped over 10 years by 2020 and Irish Euro 35 million. The lending banks successfully worked out a comeback formula that involved clean-up operations requiring the company to exit from non-core businesses, focused growth plans to bring about paybacks. Analysts put the compensation for banks’ sacrifices at Rs160 crore up to March 2012 and Rs45 crore more for March 2013.
 

Electrosteel Steels Ltd, Kolkatta
 

About 27 lenders led by SBI are expected to sanction a Rs6,950 crore debt recast plan for the troubled ESL, which landed into troubles due to delays of over a year in commissioning their Rs10,000 crore steel plant at Bokaro because of delays in clearances in the aftermath of illegal mining controversy. Efforts made in January to raise nearly $250 million either as loan or equity investment failed.
 

Orchid Chemicals & Pharmaceuticals Ltd, Chennai
 

The company has informed the BSE, “Due to continuing liquidity constraints and pressure on operations” it has initiated the process of restructuring its debt through SBI. The revenues were down 28% at Rs1,269 crore and net loss of Rs275 crore in 2012-13. Its total debts stood at Rs2,200 crore. The company plans to repay Rs800 crore received from its sale of the Penem- Penicillin business to Hospicia. Currently over 70% from its promoter holding (at 33%) is pledged.    
 

Ind-swift Ltd, Chandigarh
 

A Nine bank consortium has filed with the RBI CDR Cell an application to sort out loans extended to Chandigarh based Ind-Swift Ltd, who had defaulted due to ‘shrinking operating margins, high levels of inventories, low liquidity and escalating debt costs, impacted competitiveness arising out of mushroom growth  units in the unorganized sector because of tax exemptions and subsidies by neighbouring states, inability to pass on material cost increases to overseas customers on account of fixed nature of contracts, substantial cash accruals going into servicing debts, a fire in an unit  adding  to the liquidity crunch’. The debt recast contemplates repayments of Rs163 crore term loans and Rs102 crore corporate loans over eight years at a floating rate of 12%. Interest on term loans to be converted into funded interest term loans at 10.5% and letters of credit (LoCs) devolved up to 30^th June to be converted into working capital loan.
 

Gammon India Ltd, Mumbai
 

Gammon’s total debt rescheduled under CDR, including short and long term loans, non-convertible debenture is worth Rs14,814.17 crore. Upon the promoters providing personal and corporate guarantees, pledging shares of four of its subsidiaries, its lenders had sanctioned a ‘priority loan for meeting its immediate financial needs, waived off penal charges from the cut-off date to the date of implementation of the package, reduced the rate of interest by 1% for the 15-months January 2013-March 2014. It has reported a net loss of Rs311.49 crore so far compared to Rs445.67 crore in 2012-13.  
 

(Additional inputs from PTI, The Hindu Business Line and Economic Times.)
 

(Nagesh Kini is a Mumbai based chartered accountant turned activist.)