CDR - FROM BITTER PILL TO BARFI!
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.
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 the most recent and ‘big’ being Wockhardt. At that time, when Wockhardt got ‘hospitalised’ investors and traders dumped the stock, saying it was on death bed. But experience now shows that it was more like a hospital bed from which the company has recovered back to the pink of health. Post CDR, Wockhardt is now recommended as a good long term buy. Today, Hotel Leela is up on hopes that the CDR cell will soon approve its debt recast program. The same hope keeps HCC alive on the bourses.
Currently around 25 companies are under CDR care and majority of them are expected to complete the treatment or restructuring by Q3FY13 and emerge leaner out of the CDR cell. Total debt being restructured for around 41 companies in Q1FY13 is stated to be in the region of around Rs.20,000 crore while till date the total companies, in current fiscal, has gone up to 60 and amount to be restructured is around Rs.30,000 crore.
Though this is good for India Inc, the big question is – are companies getting the easy way out through CDRs for their follies and unviable borrowings? Companies entering CDRs has gone up dramatically and this makes one wonder whether companies are getting away scot free? As per the CDR data, a total of 50 cases involving an aggregate debt amount of Rs 40,000 crore were approved during FY12 and in FY11, 27 cases aggregating Rs.7000 crore was approved. There has been large scale criticism that the provisions of the CDR mechanism have not been used very ethically and judiciously, which in turn is responsible for the increase in CDR cases.
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, swept away by the good times.
As Mr.K.C. Chakrabraty, Deputy Governor of RBI, a strong critic of CDR has succinctly put, “There are deficiencies in the manner in which project appraisal is conducted especially with regard to cash flow analysis and determination of the date of completion of projects. When commercial operations are delayed, a host of factors including the uncertainties surrounding the project are cited as the reason. But, when there are uncertainties, these have to be accounted for during the appraisal of the project and a proper cushion needs to be built to take care of these uncertainties. Instead, the effort is to appraise a project keeping in view an aggressive repayment schedule resulting in a very short term focus of borrowers, banks and financial analysts who appraise the project. This short term focus, in many cases, is the reason for the need for successive restructuring.”
As per data, the aggregate amount of debt referred for CDR when it began in 2001 has surpassed Rs.2 trillion in FY12, touching Rs.2,06,493 crore. The biggest beneficiary of CDR is the iron and steel sector, which accounts for the largest share of total restructured debt at 26%, followed by infrastructure at 11%, textiles at 8%, telecom at 6% and fertilisers at 5.6%.
Restructuring for banks is a big drain. Data shows that at end of FY12, of the total gross advances at Rs.46,55,271 crore, restructured standard advances were to the tune of Rs.2,18,068 crore. In terms of growth, all banks at end of FY12, had shown a growth of 16.88% in gross advances but restructured advances grew 58.48%. Private sector banks showed the maximum growth in restructured advances at 67.35% compared to 58.48% by public sector banks. Foreign banks were much smarter, showing a fall of 23.76%. But in terms of ratio of restructured standard advances to gross advances, public sector banks was at 5.73% while private sector was at 1.61%.
There is no debate over the fact 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.
In July 2012, there was some tightening of the CDR norms with promoters now required to pay up to 25% of the lenders' sacrifice. But that does not seem to have stemmed the flow for CDR requests. 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.
Cancer requires treatment first, much more than those under self-inflicted substance abuse. The former is a victim of circumstance while the latter has created circumstances to become a victim.