CDR CASES DOWN BUT AMOUNT MORE THAN DOUBLES

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 and Wockhardt are the “success” stories.

But what we see now is that the companies being referred to CRDs has come down drastically. The worst was FY13, when 129 companies were referred to the CDR cell and in FY14 there were 101 companies. In FY10, when CRD first began, there were 31 companies  and what comes as good news is that in FY15, the number came down to 33 companies, almost back to where we began in FY10. It is not as though companies have suddenly become efficient, the reason could be the fact that RBI putting in the conditionality that any CDR proposal above Rs.500 crore needs to be vetted by an independent panel.

So though the number of cases have come down, the amount has more than doubled. In FY10, the CDR exposure or aggregate debt was to the tune of Rs.20,154 crore and this was at Rs.44,014 crore in FY15.

Another point to be noted here – out of the 31 cases referred to in FY10, 13 cases failed and exited while 4 exited successfully. And at end of FY15, out of 33 cases, 3 were rejected and 30 cases are still live – that means not even a single one has managed to exit successfully in the fiscal gone by.

Ever since CDR was incorporated, a total of 655 cases came to the CDR cell, and aggregate debt was Rs.4.74 lakh crore of which only 80 cases till date, have exited successfully. Even today, 285 cases remain alive with an aggregate debt of Rs.2.86 lakh crore. And there is more telling data.

In terms of sector, maximum cases, 58 out of the 285, were from the iron and steel. 41 cases were from the textile and 23 from the infrastructure. 16 cases were from the power and another 16 from the sugar. Pharma has 13 cases and 12 were from paper and packaging.

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.