Government Seeks To Revive CDR Mechanism To Resolve Bad Loans

As the government looks for new ways to resolve more than Rs 7 lakh crore in bad loans on the books of Indian banks, it may look to breathe fresh life into a mechanism used actively in previous bad loan cycles.

The corporate debt restructuring (CDR) process may be revived as a way to speed up the resolution of stressed assets, said a senior government official familiar with the matter on the condition of anonymity. The CDR mechanism may prove to be more effective than the joint lenders’ forum (JLF) due to the centralised decision-making built into it, said this person, while admitting that rules would need to be changed to allow restructuring of current cases under the CDR mechanism.

While the CDR mechanism is active and continues to oversee existing cases, hardly any fresh cases have been referred to it over the past two years, shows data available on the CDR cell website.

The CDR mechanism was first instituted by the Reserve Bank of India (RBI) in 2001 as a way to deal with corporate stress. The CDR process works on a three-tier structure and includes an empowered group, a core group and a standing forum. While the standing forum consists of representatives of all lenders, the core group is a smaller set of large industrial lenders including State Bank of India, ICICI Bank, IDBI Bank and a few others. Decision-making is centralised at the empowered group level, which consists of executive directors of the large lenders. The empowered group examines cases referred to the CDR cell and decides on whether to admit these cases or not.

In contrast, the JLF mechanism, introduced in 2014, is divided by individual cases. Each large stressed asset has a JLF which sits and takes decisions on the best way forward. The JLF process, however, has been riddled with delays ever since it was put in place with bankers complaining that it is difficult to coordinate and reach a decision on a corrective action plan for each individual account.

Under the CDR mechanism, since there is one committee which looks at all cases, it is easier to coordinate and come to a decision, a senior banker who has been involved in the CDR process said on the condition of anonymity. The banker added that lenders have asked the RBI for a relaxation in rules to allow the CDR process to be used for the existing crop of stressed loans. In February, the Economic Times first reported that bankers are seeking a revised and more flexible CDR scheme.

Under the existing rules, the mechanism can only be used to convert up to 10 percent of the debt into equity. It also requires that promoters bring in 25 percent of the amount of haircut taken by banks. Till April 2015, loans being restructured under this mechanism could be treated as standard restructured accounts, which required lower provisions than non-performing accounts. The forbearance was withdrawn as it was felt that banks were parking stressed accounts.

Banks have asked the RBI to see if they can revise the rules as in the current set of cases, a larger proportion of debt may need to be converted into equity and promoters may not be in a position to contribute much, said the banker quoted above. The RBI is looking into these requests, he said.

According to Harish Chander, executive vice president at Edelweiss Asset Reconstruction Agency, the CDR mechanism worked well during the 2003-08 period when a large number of accounts in the steel, fertiliser and textile sectors were revived using the mechanism. It is a more centralised forum compared to the JLFs, Chander told BloombergQuint. He, too, agrees that rules would need to be changed to make the CDR mechanism relevant to the current crop of bad loans.

While data for the 2003-08 period is not available, the performance of the cell in subsequent years has not been encouraging. Data available on the website of the CDR cell shows that 655 cases with an aggregate debt of Rs 4.74 lakh crore had been referred to the cell as of December 2016. Of this, 530 cases with Rs 4 lakh crore in debt were approved for restructuring under the mechanism. Roughly half of these cases, with an aggregate debt of Rs 1.25 lakh crore, have exited the cell with the failure of their restructuring plans.

The attempt to revive the CDR mechanism is part of a broader plan being worked upon to resolve stress in the banking sector. The plan is likely to involve the setting up of an overseeing committee, which can give bankers comfort on decisions to take a steep haircut on certain accounts. In addition, the government is also looking at whether some provisioning relief can be provided to banks on the interest that may have piled up on bad loans, said the government official quoted above.

Speaking at an investor conference organised by Credit Suisse last week, Vinod Rai, chairman of the Banks Board Bureau, had said that the government is looking at various structures to resolve the bad loan problem.

The final decision on any of the provisions rests with the RBI.