FROM CENTRAL BANK OF INDIA - wirc-icai.org · PDF file• CAPTIAL ADEQUACY ON AN ON-GOING BASIS ... Working Capital Term Loan ... Crisis management by operational

FROM CENTRAL BANK OF INDIA

S.Ravichandran

ECONOMIC VENTURES AND

LENDERS

• CORPORATE PERSPECTIVE-

• PROFIT

LIQUIDITY- SUSTENANCE AND SUSTAINABLE• LIQUIDITY- SUSTENANCE AND SUSTAINABLE

• BANKERS/ LENDERS PERSPECTIVE

• GOODWILL AND COMMERCIAL ISSUES

• SUSTAINED FUTURE ECONOMIC BENEFITS

• LONG TERM LIQUIDITY

• SOLVENCY OF THE CORPORATE

FACTORS IMPAIRING ASSET

QUALITY• MANAGING RISKS ASSOCIATED

• IMPAIRMENT IN LONG TERM COMMERCIAL VIABILITY

• CHANGE IN SCOPE AND SIZE OF A VENTURE • CHANGE IN SCOPE AND SIZE OF A VENTURE MIDWAY THROUGH IMPLEMENTATION

• TIME AND COST OVERRUN NOT MANAGED

• TRY TO LEVERAGE FOR MORE DEBT DESPITE BEING AWARE OF THE THRESHOLD OF ECONOMIC LOSS

WHAT IS BANKER’S PERSPECTIVE

ON ASSET QUALITY ?• BILATERAL COMMERCIAL DECISION BETWEEN BANK

AND BORROWER

• SUSTAINED LONG TERM VIABILITY AND CASH

GENERATIONGENERATION

• EXPECTS BORROWER TO ADEHERE TO THE TERMS

AND CONDITONS INCLUDING COD AND REPYAMENT

• TIMELY OPERATIONAL RESTRUCTURING OF THE

VENTURE

• EXPECTS BORROWER TO INFUSE LONG TERM FUNDS

FOR ANY EXPECTED OR UNEXPECTED LOSS.

PERSPECTIVE OF BORROWER

• REQUIRES LEAD TIME TO ENHANCE FUTURE VALUE OF ECONMIC BENEFITS

• WANTS TO TAKE ADVANTAGE OF MULTIPLE LENDING ARRANGEMENTLENDING ARRANGEMENT

• IN A POSITION TO ESTABLISH VIABILITY

• MINIMIZE LOSSESS TO CREDITORS AND STAKE HOLDERS

• REQUIRES ASSISTANCE FROM LENDERS IN AN ORDERLY AND CO ORDINATED MANNER

• PRESERVING THE BUSINESS ENTITY.

ROLE OF THE REGULATOR

• CAPTIAL ADEQUACY ON AN ON-GOING BASIS

• REGULTORY AND ECONOMIC CAPITAL

• BUFFERS TO BE BUILT UP

MARKET VALUE OF EQUITY OF THE BANK• MARKET VALUE OF EQUITY OF THE BANK

• MONITORING AND CONTROL

• RISK BASED SUPERVISION

• PRUDENTIAL GUIDELINES ON ASSET CLASSIFICATION AND PROVISIONING.

WHERE TO MEET AND BALANCE

THE ISSUES ?• BORROWERS TEMPROARILY IN DISTRESS

• CIRCUMSTANCES BEYOND THE CONTROL OF THE BORROWER

• LEGAL OR OTHER ECONOMIC REASONS WHICH • LEGAL OR OTHER ECONOMIC REASONS WHICH CASUSED DELAYS IN PROJ.IMPLEMENTATION

• GLOBAL FACTORS EXTERNAL DEVELOPMENTS

• USE TOOL OF RESTRCUTURING CONSCIOUSLY TO HELP BORROWER TIDE OVER DISTRESS.

Restructured Accounts-

Definition� A restructured account is one where the bank, for

economic or legal reasons relating to the borrower's financial difficulty, grants to the borrower concessions that the bank would not otherwise consider. that the bank would not otherwise consider.

BASIC OBJECTIVE

� PRESERVE ECONOMIC VALUE OF UNITS

� NOT EVER GREENING OF PROBLEM ACCOUNTS

� CAREFUL ASSESSMENT OF THE VIABILITY

QUICK DETECTION OF WEAKNESS� QUICK DETECTION OF WEAKNESS

� TIME BOUND IMPLEMENTATION

� RESTRUCTURED ASSET DERIVES ECONOMIC BENEFITS IN QUICKER TIME

SPECIAL REGULATORY TREATMENT

FOR ASSET CLASSIFICATION� ASSET/ACCOUNT IS FULLY SECURED

� UNIT BECOMES VIABLE IN 10 YEARS, IF ENGAGED

IN INFRASTRUCTURE ACTIVITY

� 7 YEARS IN CASE OF OTHER UNITS

� REPAYMENT- DOES NOT EXCEED 15 YEARS IN CASE OF INFRASTRCUTURE AND 10 YEARS IN CASE OF OTHER ADVANCES.

� ABOVE CEILING IS NOT APPLICABLE TO HOME LOANS.

SPECIAL REGULATORY TREATMENT

FOR ASSET CLASSIFICATION� PROMOTERS SACRIFICE AND ADDL. FUNDS

BROUGHT BY THEM SHOULD BE A MINIMUM OF 15% OF THE SACRIFICE THAT IS EROSION IN FAIR VALUE

� PROMOTERS CONTRIBUTION NEED NOT BE BROUGHT IN BY CASH.

� CAN BE BY DE RATING OF EQUITY, CONVERSION OF UNSECURED LOAN INTO EQUITY AND INTEREST FREE LOANS

� PERSONAL GUARANTEE OF THE DIRECTORS

� RESTRUCTURING IS NOT A REPEATED RESG

CORPORATE DEBT RESTRUCTURING

� WHY THE NEED FOR SUCH A SPECIALISED INSTITUTIONAL MECHANISM.

� NUMBER OF LENDERS/BANKS INVOLVED MORE

� DIFFICULTY IN CO ORDINATING THE � DIFFICULTY IN CO ORDINATING THE NEGOTIATION AND MONITORING.

� DEVISING A SYSTEM FOR A COMMON POOL OF PERCEPTION

OBJECTIVES OF CDR

� To ensure timely & transparent mechanism

for restructuring debts of viable corporate

entities facing problems, for the benefit of all

concerned.concerned.

� To aim at preserving viable corporates that

are affected by certain internal and external

factors

� To minimize the losses to creditors and other

stakeholders through an orderly and

coordinated restructuring programme.

Legal Basis

� CDR is a voluntary system based on

Debtor Creditor Agreement (DCA) and

Inter Creditor Agreement (ICA). DCA & ICA Inter Creditor Agreement (ICA). DCA & ICA

provide the legal basis to the CDR

Mechanism

CDR Set Up

� Standing Forum

� Core Group

� Empowered Group

CDR Cell� CDR Cell

Standing Forum

• Representative body of all CDR member

FI’s, Banks

• Self empowered body

• Comprises Chairman/ CMDs of all member• Comprises Chairman/ CMDs of all member

institutions

• Lays down policies and guidelines

• Monitors progress of CDR

Core Group

• Carved out of Standing Forum

• Comprises Chairmen/ CMDs of IDBI, SBI,

ICICI Bank, PNB, BOI, BOB, Chairman, IBA

& Dy Chairman, IBA (Representing Foreign

Banks)

• Assists Standing Forum in formulating• Assists Standing Forum in formulating

policies

• Addresses operational difficulties of CDR

Empowered Group

• Lays down guidelines for workouts

CDR Empowered Group

• ED level representatives of IDBI, SBI, ICICIBank as standing members

• Senior Executives of FIs, banks with exposure inconcerned company

• Executives attending EG meetings should have• Executives attending EG meetings should havegeneral authority from their Boards to takedecisions

CDR Cell

• Formats for Flash/Final Report, all CDRand RBI Circulars, Statistical Data etc.

• Assisting CDR Standing Forum/ CoreGroup/ Empowered GroupGroup/ Empowered Group

• Making initial scrutiny of proposals.Especially viability of the case andadherence of RBI guidelines.

• Placing proposals for consideration of EG

ADMISSION CRITERION

� Loan assets with an aggregate debtoutstanding ( inclusive of non fundlimits) of Rs 10 crore and above andinvolving at least two lenders.

� The case may be referred by a lender withexposure of minimum 20% by value. Acorporate can also refer its case withletter of support from a lender or lenderswith exposure of 20% by value.

ADMISSION CRITERION

� Reference of any account / case to CDRCell is asset classification neutral. Assetof any class can be admitted subject tocertain specific stipulations.

� Other stipulations regarding minimummargin from the Promoters, PersonalGuarantee of Promoters, Pledge ofpromoters holding etc have to beobserved.

Admission Criterion

(cont.)� Cases of fraud and malfeasance areineligible.

� Cases of willful default may be consideredif permitted by Core Group depending onCases of willful default may be consideredif permitted by Core Group depending oncase specifics.

� BIFR cases are eligible subject to approvalof Core Group and with certain additionalconditions.

Decision process

� Decisions in the CDR system are taken on

basis of super majority where 75% of

lenders by value and 60% of lenders by

number have to agree. number have to agree.

Components of Restructured

packages

� Within overall regulatory guidelines

� package is tailor made to suit the corporate needs.

� may involve certain concessions in rate of � may involve certain concessions in rate of interest,

� carving out irregular portion by giving Working Capital Term Loan ( WCTL)

� granting of Funded Interest Term Loan (FITL)

� conversion of debt to equity or other debt instruments. ( CAPS )

Additional Finance

• Additional Finance, if any, to be provided byCDR lenders or all lenders on pro rata basis.

• Preferential claim with respect to cash flowsin respect of additional exposures.in respect of additional exposures.

• Waterfall Mechanism is embedded in the MRAand TRA Asset classification benefits foradditional exposures as per extant regulatoryguidelines.

• Sharing additional finance compulsory only inCategory I cases.

Timeline

�Initial scrutiny for Flash Report max

30 days

� Approval of Flash : Next EG Meeting.

Approval of Final Package 60/ 90 days� Approval of Final Package 60/ 90 days

� Issue of LOA: After confirmation of

minutes

� Approval by individual lenders : 45

days Package Implementation by all

: 120 days

Key Financial

Benchmarks

� DSCR - 1.25:1

� Return on Capital Employed – 5 year G sec + 2%

� Gap between IRR and cost of capital – at least 1%

� Loan Life Ratio – 1.40

� Break-even analysis – in line with industry

� Industry indicators – EBIDTA, price realization,etc

Monitoring & Follow up

� CDR Cell ensures regular conduct of

meetings of MC and follows up on

compliance of various aspects of

Restructuring Package approved and also Restructuring Package approved and also

the operational and financial performance

of the corporate vis-à-vis the projections.

MC is a recommendatory body and

decisions are made by CDR EG.

Exit from CDR

� is possible either due to non compliance / non adherence to the package,

� external/industry level factors affecting the package implementation, external/industry level factors affecting the package implementation, improved performance of the corporate, merger with larger entity or for any other reason like OTS

� Upon Exit, Recompense clause would be triggered in certain cases.

� The sacrifices made by the CDR lenders would have to be recompensed by the corporate.

Suggested Strategies� Constant data base update

� Regular representation at CDR EG / CG

� Liaison with other nodal officers

� BCC representation at JLM / Important MC

� Securing mandate internally well in advance ofCDR EG

� Train staff on nuances of CDR

� Monitoring CDR a/cs through MMR / ASCROM

� Special focus on CDR a/cs during audit /inspection.

Support required from

Lenders�Timely submission of Flash Report and Final Restructuring Report (at least 10 days prior to CDR EG meeting)

� Regular conduct of MC meetings by MI and timely submission of minutes thereof to � Regular conduct of MC meetings by MI and timely submission of minutes thereof to apprise CDR EG / facilitate decision by CDR EG

�Adherence to time lines and conditions mentioned in LOA. Sanctions committed in package and Disbursements thereof to be expedited

Support required from

Lenders�Part Mandate ( for e.g. – Supporting

package but no additional finance ) or

change of stand taken at JLM for

finalization of package / reference to CDR to finalization of package / reference to CDR to

be avoided.

� Deputing of senior executive to attend

CDR EG meetings especially when the

lender has a case under discussion.

CDR- How to use the platform

judiciously ?� Crisis management by operational

restructuring by the corporate should reflect

the commitment of corporate

� Existing mechanism is transparent� Existing mechanism is transparent

� Should not be abused based on slight change /

slowing down of the economy or particular

sector

� Thrust by lenders on other credit

management area

� Regulatory forebearance – relaxation may not

be continously available

TRENDS- ONEParticulars-RS.IN

CRORE

MAR-2009 MAR-2010 MAR-2011 MAR-2012

Gross advances 27,53,365 32,27,287 39,82,954 46,55,271

Growth rate -2009 TO2012.

17.21% 23.41% 16.88%2012.

CAGR 19.13%

Restrcutured -standard 75,304 1,36,426 1,37,602 2,18,608

Growth rate 81.17% 0.86% 58.48%

GAGR 42.54

RESTRCURED ADV. TO GROSS ADVANCES.

2.73% 4.23% 3.45% 4.68%

TRENDS- TWOPARTICUL. 2009-10 2010-11 2011-12

PERCENT GR.ADV RES.ADV GR.ADV RES.ADV GR.ADV RES.ADV.

ALL BANKS 17.21 81.17 23.41 0.86 16.88 58.48

CAGR-09-12 (42.54)CAGR-09-12 (42.54)

PUBLIC SECTOR

19.81 96.59 22.98 3.86 16.02 58.33

CAGR-09-12 (47.86)

PRIVA. SEC. 12.80 5.60 26.60 -28.48 20.65 67.35

CAGR-09-12 ( 8.12)

FOREIGN.BK -1.38 -25.06 19.60 -27.56 16.35 -23.76

CAGR-09-12 (-25.48)

THE WAY FORWARD

� EXISTING TRENDS- SIGNIFICANCE

� FROM PUBLIC POLICY STANDPOINT, BROADER ECONOMIC AND SOCIAL PERSPECTIVE-RATHER DISQUIETING DISQUIETING

� RESTRCUTURING TO BE CONSIDERED ONLY UNDER SPECIFIC CONDITIONS

� CORPORATE WILLING TO SHARE THE BURDEN

� BELT TIGHTENING INITIATIVES.

THE WAY FORWARD

� PROJECT APPRAISAL STANDARDS ARE SIGNIFICANTLY ENHANCED.

� PROFESSIONALS SHOULD PLAY IMPORTANT ROLE IN ENHANCING VIABILITYROLE IN ENHANCING VIABILITY

� LOOK FORWARD TO WORK WITHOUT ECONOMIC SACRIFICE WHICH IS AN ISSUE FOR THE BANKS CAPITAL ADEQUACY

� AVOID DEBT FUNDING OF PROMOTERS FURTHER EQUITY INFUSION.

THE WAY FORWARD

� OVER LEVERAGING THE PROJECT IS AVOIDED

� PROVISION FOR RE COMPENSATION

� ACCELERATE REPAYMENT

NURTURING OF VIABLE ACCOUNTS IN THE LONG � NURTURING OF VIABLE ACCOUNTS IN THE LONG TERM INTEREST OF LENDER AND BORROWER

� REORIENTATION OF THE APPROACH OF THE LENDER TO SHOW MORE COMPASSION TO SMALL CUSTOMERS UNDER MSME

THE WAY FORWARD

� NEED FOR STRCUTURED MECHANISM FOR SME, RETAIL, AGRICULTURAL LOANS

� STRUCTURE WILL NEED TO BE BUILT IN AT VARIOUS LEVELS AT THE STATE, DISTRICT VARIOUS LEVELS AT THE STATE, DISTRICT REGION AND BANK LEVELS.

� FUNCTIONARIES AT DIFFERENT LEVELS BEING EMPOWERED TO ASSESS THE VIABILITY ISSUES UNDER THE PRUDENTIAL GUIDELINES IN RESTRCUTURING

� EXPECTS TO PERCOLATE THE BENEFITS TO SMALLER ACCOUNTS.

CONCLUSION

�STRCUTURE THE PROJECT

FOR AN ECONOMIC VALUE FOR AN ECONOMIC VALUE

BUT NOT WITH AN OPTION

TO RESTRCUTURE IN

FUTURE