Restructuring of Advances

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Restructuring of Advances

• Presented by-
• CA Santanu Ghosh
• 21.03.2014
  ACAE

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Introduction Infrastructure development is a
welcome step taken by Central and State
Governments. This encourages not only hard core
infrastructure projects but the various other
projects in the manufacturing and other sectors.
With the golden quadrilateral project initiated
during the Prime Ministership of Shri Atal
Behari Bajpayee, we have seen phenomenal increase
in the manufacturing sector including service
sectors such as IT and ITES. The Banking system
made substantial investment by way of Term
finance and working capital finance but on
account of several reasons such as changes in the
market, changes in the regulations, substantial
variation in the foreign exchange parity rates
etc., the projects could not be completed on
time. This resulted in default by the borrowers
or serious hardships faced by them for genuine
reason or reasons beyond their control. Such
projects which are considered viable are being
supported by the financial sector by way of
Corporate Debt Restructuring, about which this
presentation has been prepared.
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Restructuring of Advance

• As per the guidelines issued by the Reserve
  Bank of India Restructuring is divided into four
  categories.
• Restructuring of advance extended to Industrial
  Units.
• Restructuring of advance extended to Industrial
  Units under
• Corporate Debt Restructuring Mechanism.
• Restructuring of advance extended to Small and
  Medium
• Enterprise.
• Restructuring of all other advances.
• In the above four sets of guidelines,
  differentiation is broadly based on whether the
  borrower is engaged in Industrial activity or non
  industrial activity. The major criteria in the
  prudential regulation is that the borrowers
  engaged in industrial activities continued to be
  covered under the existing asset classification
  norms upon restructuring.

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Eligibility Criteria for Restructuring of advance

• Banks may restructure the advance under standard,
  sub-standard and doubtful category.
• Banks cannot reschedule, restructure the accounts
  with retrospective effect.
• Process of reclassification should not stop
  simply because the process of restructuring
  proposal is under consideration.
• Normally restructuring cannot take place unless
  the alteration/changes in the original loan
  document is made with the consent of the
  borrower.

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Norms Assets Classification

• Restructuring of advance can take place in the
  following stages
• Before commencement of commercial production.
• After commencement of commercial production but
  before the asset has been classified as sub
  standard.
• After commencement of commercial production and
  the asset has been classified as sub standard or
  doubtful.

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• No account should be taken up for restructuring
  unless the financial viability is established and
  there is reasonable certainty of repayment.
• Parameters which are to be considered for
  restructuring will include
• Return on Capital Employed, Debt Service Coverage
  Ratio, Gap between Internal Rate of Return and
  Cost of Funds and the amount of provision
  required in lieu the diminution in the fair value
  of restructured advance.
• BIFR cases are not eligible for restructuring
  without their express approval.

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Special Regulatory Treatment Asset
Classification

• Exposure of the banks towards the following
  categories are not eligible to be treated as
  standard asset upon restructuring. These types of
  advances should be immediately downgraded upon
  restructuring.
• Customer and Personal advances
• Advances towards Capital Markets
• Advances Treated as Commercial Real Estate.
• Accounts classified as standard assets should
  be immediately re classified as sub standard
  asset upon re-structuring.

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Provision on restructured accounts

• Restructured accounts classified as
  non-performing advances, when upgraded to
  standard category will attract a higher provision
  (as prescribed from time to time) in the first
  year from the date of up gradation.
• The above-mentioned higher provision on
  restructured standard advances(2.75 per cent as
  prescribed vide circular dated November 26, 2012)
  would increase to 5 per cent in respect of new
  restructured standard accounts(flow) with effect
  from June 1, 2013 and increase in a phased manner
  for the stock of restructured standard accounts
  as on May 31, 2013 as under

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• 3.50 per cent - with effect from March 31, 2014
  (spread over the four quarters of 2013-14)
• 4.25 per cent - with effect from March 31, 2015
  (spread over the four quarters of 2014-15)
• 5.00 per cent - - with effect from March 31, 2016
  (spread over the four quarters of 2015-16)

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Corporate Debt Restructuring Mechanism

• Objective
• The objective of the CDR is to ensure timely
  and transparent mechanism for restructuring the
  corporate debts of viable entities facing
  problems outside the preview of BIFR DRT and
  other legal proceedings.
• Scope
• The CDR mechanism has been designed to
  facilitate restructuring of advances of borrowers
  enjoying credit facilities from more than 1 bank
  and Financial Institutions. CDR is available to
  borrowers engaged in all types of activity
  subject to the following conditions
•  

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• The borrower enjoys credit facility from more
  than One bank/FI under multiple banking/
  syndication/ Consortium system of lending.
• The total exposure (Fund based and non fund
  based) is Rs10 crores and above.

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CDR System has a three tier structure

• CDR Standing forum and its Core Group
• a) This Forum would be the representative
  general body of all FI and banks participating in
  the CDR System. This is a self empowered body
  which will lay down policies and guidelines and
  monitor the progress of CDR.
• b) The Forum will provide an official
  platform for both the creditors and borrowers to
  amicably and collectively evolve policies and
  guidelines for working out the debt restructuring
  plans.
• c) The CDR Core Group will lay down policies
  and guidelines to be followed by the CDR
  Empowered Group and CDR Cell for restructuring.

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• d) The Forum will comprise of Chairman and MD,
  Industrial Development bank of India, Chairman
  SBI, Managing Director and CEO of ICICI Bank Ltd,
  Chairman IBA as well as the Chairman and MD of
  all banks and Fis participating as permanent
  member in the system. Since UTI, GIC, LIC may
  have assumed exposures on certain borrowers these
  institutions may participate in the CDR System.
  The Forum will elect the chairman for one year
  and the practice of rotation will be followed in
  subsequent years.
• e) The Forum shall meet at least once in every
  six months and would
• review and monitor the progress of the CDR
  System. The Forum would
• lay down policies and guidelines including those
  relating to critical
• parameters for restructuring.

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• CDR Empowered Group
•  a) The individual cases of CDR shall be decided
  by the CDR Empowered Group consisting of ED level
  representatives of Industrial Development Bank of
  India Ltd., ICICI Bank Ltd and SBI as standing
  members. In addition to ED level representatives
  of FIs and banks who have exposure to the
  concerned company.
• b) The group will consider the preliminary report
  of all cases of requests of restructuring
  submitted to it by the CDR Cell. After the
  Empowered Group decides the restructuring of the
  company is prima facie feasible and the
  enterprise is potentially viable in terms of the
  policies and guidelines evolved by the Standing
  Forum, the detailed Restructuring package will be
  worked out by the CDR Cell in conjunction with
  the Lead Institution.

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• c) The Group would be mandated to look into each
  case of debt restructuring, examine the viability
  and rehabilitation potential of the company and
  approve the restructuring package within 90 days
  or maximum by 180 days of reference to Empowered
  Group. The CDR Empowered Group shall decide on
  the acceptable viability benchmark levels on the
  following parameters.
•  
• Return on Capital Employed,
• Debt Service Coverage Ratio,
• Gap between Internal Rate of Return and Cost of
  Funds,
• Extent of Sacrifice
•  

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d) The Board of each bank/FI should authorize the
CEO or ED to decide on the restructuring package
in respect of cases referred to the CDR System.
The Group will meet on two or three occasions in
respect of each borrowable account. This will
provide an opportunity to the participating
members to seek proper authorization from their
CEO/ED in case of need.   e) The decision of
the CDR empowered Group will be final if the
restructuring of the debt is found to be viable.
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 CDR Cell

• a) The CDR Standing Forum and CDR Empowered
  Group will be assisted by a CDR Cell in their
  functions. This cell will initially scrutinize
  the proposals and proceed further with the
  proposal. If not found satisfactory the Creditors
  will initiate action fro recovery.  
• b) All references for CDR by creditors and
  borrowers will be made to the CDR Cell. The CDR
  cell will prepare the restructuring plans in
  terms of the general policies and guidelines
  approved by the CDR Standing Forum and place for
  consideration to the Empowered group.
• c) The CDR Cell will have adequate No of
  staff deputed from banks and FIs. The Cell might
  also take professional help. The cost in
  operating the CDR Mechanism including CDR cell
  will be met from the contribution of the
  financial institutions and the banks in the core
  group at the rate of Rs 50 lacs each and
  contribution from other institutions and banks _at_
  Rs 5 lacs each.

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 Reference to CDR System

• Reference to CDR system can be triggered by
• Any one or more creditors who have minimum 20
  share in either working capital or term finance
• By concerned corporate if supported by bank or
  financial institution having stake as in previous
  above.
•  
• Though flexibility is available whereby the
  creditors could either consider restructuring
  outside the purview of the CDR System or even
  initiate legal proceedings where warranted
  banks/FIs should review all eligible cases where
  the exposure of the financial system is more than
  100 Crores and decide about referring the case to
  CDR system.

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Thank you!!!