Corporate Debt Restructuring

 

1. The Reserve Bank of India (RBI) has constituted a committee headed by Sri K.V.Kamath to suggest guidelines on one-time loan restructuring. Other members of the committee will be former State Bank of India managing director Diwakar Gupta, T N Manoharan, former chairman, Canara Bank; banking expert Ashvin Parekh; and Sunil Mehta, chief executive officer of the Indian Banks’ Association (IBA) as the member-secretary.

 

2. In view of the covid-19 pandemic it is expected that a huge number of firms are likely to seek relief under the proposed guidelines.

 

A Business Standard analysis of the companies that have announced their results for the April-June quarter indicates that companies which either reported operating losses or a poor interest coverage ratio (ICR) accounted for nearly 45 per cent of corporate borrowing. 

 

3. Mrutyunjay Mahapatra, MD and CEO of the erstwhile Syndicate Bank has felt that “A loan account shows signs of stress two quarters prior to becoming ‘default’. This is typically when ‘ever-greening’ happen. Evergreening is a practice whereby banks extend even more loans to debt-laden companies to help them repay previous loans and hopefully earn enough revenue along the way to get out of trouble. It has been a pretty common practice in India, contributing to the banking sector's mushrooming bad debt pile and this mainly comes out of reluctance of the officer/team dealing with the loan to bite the bullet and call the loan ‘bad’.

 

“It’s important to distinguish between a legacy problem and a problem that is Covid-related. Many units in India were having problems even prior to Covid, and so, March 1 is a good date from that angle,” said a former deputy governor of the RBI.

 

4. Banks also need to look at intra-group leverage of the companies at the time of restructuring debt. Intra-Group Debt means any money or liabilities, owing or incurred to one Group Company by another Group Company together with all accruing interest and costs. Companies lending to group companies for unproductive usage would have to service the debt of the lending and borrowing entity in the group leading to failure of the restructuring exercise. Hence the extend of leveraging in intra-group debt is important.

 

5. Bank officers are unwilling to allow any restructuring out of fear of failure of the restructuring process.

 

In a note to the Parliamentary Estimates Committee on bank non-performing assets in September 2018, former RBI governor Raghuram Rajan had said that the “risk-averse bankers, seeing the arrests of some of their colleagues, are simply not willing to take the write-downs and push a restructuring to conclusion, without the process being blessed by the courts or eminent individuals”, leading to an “endless” delay in the process. 

 

The restructuring might not actually take place in the case of companies who are otherwise eligible as per guidelines.

 

6. Many companies are so cash strapped that they might not have the money to service the initial requirements for the restructuring to kick-in. If they are unable to do so, they would be declared defaulters and bankruptcy proceedings could kick in. Experts feel that this might be the case for many companies.

 

7. It is said that a problem with the previous restructuring schemes was that the banks didn’t have a structure in place to do a thorough review of the proposals. Risk management and economic planning needed to be incorporated in the bank’s workflow and institutional as well as individual capacities need to be built up.

 

8.  The path that a company would take after the restructuring exercise is difficult to predict, for the promoters and much more so for Bankers. 

 

“The biggest problem with any restructuring plan is how I predict what my top line and bottom line are going to be,” said the former deputy governor. Banks engaged in the erstwhile mechanism of corporate debt restructuring (CDR) had no clue, so they used to “cook up things. They used to put their own revenue assessments and a discounting rate of their own discretion to calculate the net present value of their sacrifice”, said the former RBI official.

 

“There is no way even now banks will be able to calculate that and that is where the Kamath panel can set up the entry points and draw a benchmark based on sectors.” The panel doesn't need to look at individual accounts to give their approval of a resolution, but can set rules for sectors that were hit the hardest due to the pandemic and need restructuring, such as aviation, tourism, hospitality.”

 

9. It is also important to ensure that companies that do not need restructuring do not jump onto the Bandwagon. Companies and promoters would have to be more tightly bound by way of personal guarantees, increased collaterals, bringing in additional equity etc.

 

10. Finally, Banks would need to decide if it is better to take a company to the insolvency court today or at a later date after giving them one more chance.