The Hindu Business Line : SFCs more open now to corporate debt revamp

The sources also said that initially none of the SFCs were willing to become part of the CDR. The resistance was partly driven by their reluctance to take any "haircuts", implying a reduction in interest rates and rescheduling of the assets.

The fear was that it would result in reducing their interest incomes and lead to negative interest margins.

The fears were that CDR would result in lower interest earnings than the cost of the servicing their working funds.

Consequently, many of them had initially adopted aggressive recovery efforts in a bid to reduce NPAs.

But, the sources said, the recovery efforts were successful only to a small extent and had failed to correct asset liability mismatches.

As a result, many of SFCs have now decided to take the "haircut". The reduction in the lending rates was also facilitated by their reduced costs of borrowings.

The SFCs have been able to refinance some of the outstanding liabilities at eight per cent, down from 12 per cent in 2001.

This is despite the fact that they no longer had the support of SLR borrowing as in the past. It has, in turn, helped them to bring down the weighted average cost of working funds.

Karnataka State Finance Corporation (KSFC) is one of the companies that have adopted that the CDR mechanism for rehabilitation of sub-standard assets to standard assets.

Dr Nethaji Ganeshan, Executive Director (Operations), said: "The CDR offer by us has received a very good response."

But bankers said that the SFCs' willingness to participate in CDR was also influenced the success of large public sector banks, especially after some PSU banks bought off some of the stressed assets of the SFCs at steep discounts and managed to turn them around into standard assets.

Besides, bankers had also communicated to the SFCs that they would be allowed to exit consortium loans if they were not willing to participate in the CDR packages.

The losses through such cases would be steep, which few SFCs are willing to incur, especially at a time when stressed assets have already shaved off their capital.