By Ruma Dubey

Corporate Debt Restructuring or CDR is hugely popular with traders.  The moment a company announces that it is getting into CDR, the stock price zooms up. This is like a patient diagnosed with cancer; the moment one gets to know that chemo and other medications have been started, there is hope and hence optimism. The same psyche is true for CDR; it is hope that things will now improve for the company. Like getting into rehab – the company will emerge lean and clean after getting into CDR.

In simple parlance, CDR is given to companies reeling under debt which has been borrowed from a consortium of bankers and institutions. Companies are not able to repay debt and banks, to protect their interest too, reduce rates or sometimes extend repayment schedules.  So promoters borrow mindlessly and then banks bail them out. Sometimes, the bailout is right but sometimes, unscrupulous companies take advantage and get away. To help someone when in distress is humane and when companies cry out for help, naturally, they need a helping hand. So to question whether CDR is required or not is futile but more relevant is why so many companies are opting for CDR? Is it because of a general downturn in the economy or is it gross misuse of the CDR mechanism?

Undoubtedly, excessive leveraging by companies when the times were good is a prime reason and that in turn means, banks, through CDRs are being punished for the follies of the companies. But banks also, when lending, had probably gone overboard, allowing logic to take a back seat. We are seeing the ills of the same in rising NPAs of banks – both public as well as private sector banks.

Earlier CDR meant the company was close to being declared sick but today, everyone knows the company is in trouble but CDR is like a magic pill that will get the company back into health. This positive perception towards CDR is on account of various past success stories – India Cements, Essar Oil, Nagarjuna Fertilisers, Suzlon and Wockhardt are the “success” stories.

But what we see now is that the companies being referred to CRDs have come down drastically and in Q1FY18, eight companies with a total debt of Rs 6,677 crore have successfully exited the CDR cell. This includes Haldia Petrochemical, Oudh Sugar, E-Land Apparels and Ginni Filaments.

The CDR cell, right from its inception in 2005 till 31st May 2017 has received 656 references to its cell, seeking restructuring debt to the tune of Rs.4,74,351 crore. Out of this, 531 cases, aggregating debt of Rs. 4,03,353 crore were the total number of cases approved by the CDR cell. Till date, 103 cases have exited successfully and 150 are still under consideration. Interestingly, in FY16 there was not a single recast request!

In terms of sector, maximum cases, 34 out of the 150, were from the iron and steel. 18 cases were from the textile and 15 from the infrastructure. 6 cases were from the power and another 10 from the sugar. Pharma has 6 cases and 10 were from construction.

The trend we see now is that the number of cases which are being referred to the CDR cell has come down. Even sector wise, iron & steel continues to remain the one with highest debt while that in power has come down. Construction sector debt going up is again a reflection of things on the ground.

There is no debate on whether CDR is required but banks need to get more vigilant and CDR should not become a norm but a special helping hand only under special circumstances which are beyond management control but not due to mistakes made by the management. Examining the viability of the project should become a prerequisite for sanctioning any CDR for which project appraisal methods and ways need to get more efficient. And yes, banks need to be more concerned with leveraging and not with the fact that they are getting business. Even a man on the street will tell you that a high leveraged project is high risk and banks, somewhere, in their need to enhance their own balance sheets have forgotten that.

CDR as a process, on moral grounds needs to get tightened. Money in the banking sector is precious and it cannot be squandered away just because a few bankers and promoters got carried away by their ambitions.