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Corporate debt restructuring cases are weighing down banks and financial institutions.
In 2011-12, corporate debt aggregating a whopping Rs 76,251 crore came up for restructuring before the Corporate Debt Rrestructuring Cell jointly promoted by banks and financial institutions. This is three times more than in the previous year, showing the growing stress on India Inc. As many as 95 banks and financial institutions are part of the CDR mechanism.
Vulnerable sectors
A large number of road, telecom, iron and steel, and textile projects have come up for restructuring, according to credit rating agency S&P's outlook for Indian banks.
Economic downturn, high interest rates, use of working capital funds for funding capital expenditure, diversion of funds and adverse currency movements are some of the reasons for the sharp increase in corporate debt restructuring cases, said a senior banker.
In the April-June quarter of 2011-12, the cell received 16 corporate restructuring cases with debt aggregating Rs 4,682 crore. In the July-September quarter, it received 19 cases (debt aggregating Rs 23,071 crore); in the October-December quarter: 25 cases (Rs 22,497 crore); and in the January-March quarter: 23 cases (Rs 26,001 crore).
Big cases
Some of the big corporate debt restructuring cases referred to the cell include GTL group (Chennai Network Infrastructure Ltd: Rs 6,320 crore, GTL Ltd: Rs 5,920 crore; and GTL Infrastructure Ltd: Rs 4,565 crore); Hindustan Construction Company (Rs 7,822 crore); Hotel Leela Ventures (Rs 4,296 crore).
Sickness spreading
“Corporate sickness seems to be spreading. Earlier, our bank used to have not more than 3-4 corporate debt restructuring cases at a time. But now we are dealing with about 30 cases,” said a senior official with a mid-size public sector bank.
S&P has said that the asset quality of Indian banks is likely to remain weak due to the moderation in economic activity, high inflation, and high interest rates. “We expect a sharp rise in restructured loans in fiscal years 2012 and 2013. Small and mid-size companies are particularly vulnerable. Stress is also mounting on some highly leveraged large companies,” S&P said.
Under CDR, creditors, among others, make concessions by reducing the interest rate, rescheduling repayments, converting debt into equity/ preference shares, and waiving principal/ interest (to a limited extent) to turnaround the companies.
RBI guidelines
According to the RBI guidelines, CDR applies only to multiple banking accounts/ syndicates/ consortium accounts with outstanding exposure of Rs 10 crore and above with banks and financial institutions.
For a corporate account to be referred to the CDR cell, the support of 60 per cent of creditors by number in addition to the support of 75 per cent of creditors by value is required with a view to make the decision making process more equitable.
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