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Financial Blog Corliss Group: Desperate for breathing room

Financial Blog Corliss Group: Desperate for breathing room | Corliss Online Financial Mag | Scoop.it

The slowdown in the economy after 2010-11 has had a ripple impact on the fortunes of India Inc. and lenders alike. With gross domestic product (GDP) growth decelerating from 8.4 per cent in 2010-11 to the sub-five per cent level in the first three quarters of the current financial year, the number of companies seeking succour( http://corlissonlinegroup.com/ ) from lenders under the aegis of the corporate debt restructuring (CDR) cell had almost doubled to 605 as of December 2013 against 305 as of March 2011.

 

Further, there has been a 194 per cent jump, from []1,38,604 crore at the end of March 2011 to []4,07,656 crore as of December 2013, in the amount of loans that came up for recast.

 

Therefore, it is not surprising that bank managements, in their internal meetings and conferences with the media and analysts, are devoting as much time fielding questions on the loans that had to be restructured in a quarter vis-à-vis loans that have gone sour.

 

Myriad problems

 

Many factors have forced companies to approach banks for a loan recast. These include the slowdown in domestic as well as global demand, volatility in input costs, adverse currency movements, and projects getting stalled for want of statutory approvals such as environment and forest clearance.

 

Other reasons include diversion of funds into real estate, diversification into unrelated businesses, and too much debt on their balance sheets.

Under CDR, lenders, among others, make concessions to corporates by reducing interest rates, extending the repayment schedule, providing additional funding, and converting debt into equity/preference shares (to a limited extent).

 

The CDR cell is the banking industry’s common platform for corporate debt restructuring. All references for corporate debt restructuring by lenders/borrowers are made to this cell.

 

The CDR mechanism covers only multiple banking accounts, syndication/consortium accounts, where all banks and institutions together have an outstanding aggregate exposure of []10 crore and above.

 

Industry-wise classification shows that the infrastructure sector topped the corporate debt restructuring list, accounting for 19.63 per cent of the total quantum of debt ([]2,07,635 crore) being handled by the CDR cell as of December 2013. The iron & steel sector was a close second with 17.92 percent.

 

Plugging loopholes

 

The economic downturn provided the perfect pretext for some unscrupulous company promoters( http://corlissmag.livejournal.com/ ) to try and wangle concessions from banks.

 

There have been cases where the realization that a corporate is going down the chute prompted some bank chiefs, especially from the public sector, to push it to the corporate debt restructuring cell just so they could get a breather on the asset classification front and save on provisioning.

 

In such cases, company promoters have ‘gainfully’ utilized the time taken by the lead bank to conduct techno-economic viability studies and stock audit to take a call on accepting/rejecting the debt recast proposal to alienate (sell) the assets pledged to banks.

 

The RBI has seen through this game and prescribed tighter norms for reviving distressed assets. So has the CDR cell.

 

The lead bank in a consortium of lenders is now required to conduct an audit of how a company has utilized a loan before processing its request for a debt recast.

 

According to Raj Kumar Bansal, Chairman of the CDR cell, the lead bank in a consortium could also press for a special audit wherever diversion of funds and fraud are suspected.

 

To ensure company promoters’ commitment to the debt recast package, the lenders now compulsorily take a personal guarantee from promoters.

The CDR cell also requires minimum promoter equity contribution in all cases to be either 25 percent (against 20 percent prescribed by the RBI) of a lender’s sacrifice or 2 per cent of the restructured debt.

 

The time given to a company whose debt restructuring has been approved by the cell to turn around has been cut to eight years (from 10 years) in the case of infrastructure companies and five years (seven years) in the case of non-infrastructure companies( http://corlissonlinegroup.com/blog/ ).

 

Banking on a rising tide

 

The stiff norms seem to have slowed the flow of debt recast proposals. Overall, in the first 11 months of the current financial year, the CDR cell received debt recast references with respect to 91 companies (against 129 in the whole of the previous year), aggregating about []1,22,500 crore ([]91,497 crore in 2012-13).

 

With few days to go for the fiscal year to end, bankers expect the overall quantum references to the cell to touch about []1.30 lakh crore in 2013-14. Until the economy turns around, companies will keep knocking on the doors of the cell for succour.

 

As a rising tide lifts all boats, so, too, bankers hope an economic upturn will bring down the number of cases referred to the CDR cell.

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Corliss Online Group Financial magazine on Travel Talk

Corliss Online Group Financial magazine on Travel Talk | Corliss Online Financial Mag | Scoop.it
I’m grumpy about flying these days. Part of it is just the hassle of the process, but now there’s even
Felipa Adams's insight:
I’m grumpy about flying these days. Part of it is just the hassle of the process, but now there’s even more. Bud and I had a decades-long strategy of managing our US Airways frequent flier status to maximize free upgrades on domestic and European routes, as well as to secure virtually free first-class seats on flights to Oceania, Southeast Asia and Africa. Trust me, there’s nothing like being pampered in first class on Singapore Air to take the sting out of flying! Sadly, airline rewards and loyalty benefits are going the way of free meals – or free anything – in the air. The Old: Back in the day, you earned elite status (and the accompanying benefits/privileges) by actually flying the miles. Most promotions (say, double “qualifying” miles for status on certain routes) targeted existing members to encourage loyalty. This kept the rarified air of first-class upgrades cozy. Special check-in lines, private lounges with free cocktails and food – like that. Upgrades were doled out according to rigid rules – highest status first. Then came along airline affinity credit cards that allowed anyone holding them (imagine!) to use the first class check-in process – no matter if you had a lowly economy ticket. Promos of all kinds expanded until there were lots of ways to get upgrades and privileges – resulting in more competition among flyers and less actual revenue generated from the premium seats. Hmmm, thought the airlines . . . what to do? The New: 2014 will bring changes galore – many of them retooling loyalty programs to extract more revenue. For one thing, the merger between American and US Airways is a done deal. Those of us who spent 25-plus years being loyal to US Airways (and the Star Alliance network) will be acclimating to American and One World. For starters, American allows passengers to bid on seat upgrades – more revenue for them, less availability for elite members. For another, there are fewer international routes on One World than on Star Alliance. So . . . fewer destinations, fewer seats. Some airlines (Delta and United) will require minimum spending of $2,500 to more than $10,000 in addition to miles flown or earned to achieve status. This while many airlines are reducing the number of premium seats available – though they are actually installing better seats. What To Do: So should we bother with elite status any more? George Hobica, founder of airfarewatchdog.com, wrote on the subject recently for USA Today – and says not so much. Better to scan the internet and watch for deals on premium seats, especially last-minute upgrades – or upgrades offered as you check in. Bud and I passed up $50 upgrades to premium economy seats on a Virgin Atlantic flight to London in November – something we will never, ever do again! For specific tips, try farecompare.com in addition to airfare watchdog.com, frequentflier.com or try a free trial at the pricey (but maybe worth it) firstclassflyer.com.
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