Dealing with Credit Default & Stressed

Assets
Whats default?
A loan default simply means that the borrower
has not met his/her obligations when it comes to
his/her agreement to repay a loan.

This can be something as simple as just missing a

payment or being late on a payment, or it can be an
avoidance of all payments.
How to deal with Credit Default
Usually, when borrower is in default, the organization that he/she is
indebted to will begin to contact you to get their money. Initial
contacts are usually quite painless merely reminders to pay. As the
default continues, however, companies tend to get more aggressive,
contacting the borrower repeatedly with stronger language.
Eventually, this will begin to affect the borrowers credit (usually
when he has been in default for thirty days or more), which makes it
harder for him to get other loans, can increase his insurance
payments, and can even affect his ability to get a job (as many jobs
now run a credit check before they hire people).
Eventually, a loan default results in repossession or foreclosure (if
the debt has collateral) or having that debt turned over to a
collection agency (if the debt doesnt have collateral).
What should the borrower do?
As soon as the borrower recognizes that he is in default
on a loan or about to be in default,contact
immediately the lender. Go over the situation in
detail with them and see what options are available to
him
Most of the time, lenders would far rather work out a
payment solution directly with the borrower than
entering into a foreclosure situation. Quite often,
foreclosures and repossessions and collection situations
are the result of a lack of communication between the
borrower and the lender.
What if the borrower doesnt
have the money to pay?
This is the reason that most people areafraidto be proactive about
their debt situation. They simply dont have the money to pay the debt,
and they figure that contacting the lender wont help, so instead they
choose to stay put and hope things get better.
Heres the problem with that approach:lenders will assume that
the borrower has no intent to pay.They have no reason to believe
otherwise, so they will lump the borrower in with the rest of their debts
and treat him in a standard fashion.
If the borrower is making a genuine effort to repay his debts,
then the borrower is far more likely to get an easier payment
schedule, a forbearance, or some other solution if you contact your
lender and deal with the situation.
What if the borrowers debt is
already in collections?
If the borrowers debt has already been turned over to a
collection agency, his best bet is to negotiate with the
collection agency. Do this entirely in written form via
registered mail with receipt requested, not over the phone,
and keep thorough records of this process. Even if they call
you, ignore the call and follow up with mail.
If his debt is already in collections, the bad news is that his
credit has already been significantly damaged. The good
news is, though, that he should be able to negotiate a
conclusion that can somewhat reduce the damage for an
amount much smaller than the face value of the debt.
Stressed Assets
To understand stressed assets we have to understand NPA and
Restructured assets. This is because:
Stressed assets = NPAs + Restructured loans + Written off assets
Assets of the banking system comprises of loans given and
investment (in bonds) made by banks.
Quality of the asset indicates how much of the loans taken by the
borrowers are repaid in the form of interests and principal.
The most important scale of asset quality is Non Performing Assets
(NPA). NPA means interest or principal not repaid by the borrower
during a specified time period.
Bad assets are further classified into substandard asset,
doubtful asset, and loss assets depending upon how long a
loan remains as an NPA.
Measuring stressed assets

A new classification is made in the form of stressed

assets that comprises restructured loans and written off
assets besides NPAs.
Stressed assets = NPAs + Restructured loans + Written
off assets

NPA is a loan whose interest and/or installment of

principal have remained 'overdue ' (not paid) for a
period of 90 days is considered as NPA.
What is restructured loans?
Restructured asset or loan are that assets which got
an extended repayment period,
reduced interest rate,
converting a part of the loan into equity,
providing additional financing, or
some combination of these measures.
Hence, under restructuring a bad loan is modified as a new loan.
A restructured loan also indicates bad asset quality of banks.
This is because a restructured loan was a past NPA or it has
been modified into a new loan. Whether the borrower will
repay it in future remains a risky element. Corporate Debt
Restructuring Mechanism (CDM) allows restructuring of loans.
What is written off assets?
Written off assets are those the bank or lender doesnt count
the money borrower owes to it.
The financial statement of the bank will indicate that the
written off loans are compensated through some other way.
There is no meaning that the borrower is pardoned or got
exempted from payment.
The ratio of stressed assets to gross advances of the Indian
banking system is increasing from 2013 onwards. It has risen
from around 6 per cent at the end of March 2011 to 11.1 per
cent by March 2015.
Public Sector Banks have the highest stressed asset ratio
13.5 per cent of total advances as of March 2015, compared
to 4.6 per cent in the case of private sector banks.
Meaning of Corporate Debt Restructuring (CDR)

Refers to restructuring of the outstanding debts of a

company when it finds difficulties to repay the same.
CDR Comprises of
- provisions of moratorium,
- spreading the obligations over a longer period of time,
- conversion of part of the debt into equity or preference
capital - reduction of interest rate,
- payments out of promoters contribution / sale of surplus
assets etc.
Corporate Debt Restructuring in
India
Introduced in 2001
Based on systems prevalent in UK, Thailand, Korea,
Malaysia etc.
Voluntary, non-statutory system
Allows a distressed company with two or more lenders
with debt of more than Rs. 10 Crore to restructure
Consent of lenders representing 75% or more in value
and 60% or more by number
Based on Debtor Creditor Agreement (DCA) and Inter
Creditor Agreement (ICA)
Objective & Scope of CDR
Objective
To ensure timely and transparent mechanism for restructuring the
corporate debts of viable entities facing problems, outside the purview of
BIFR, DRT and other legal proceedings, for the benefit of all concerned.
Scope of CDR
Organizational framework institutionalize for speedy disposal of
restructuring proposals
Available to all borrowers engaged in any type of activity subject to the
following conditions: a) The borrower enjoys credit facilities from more
than one bank / FI under multiple banking / syndication / consortium
system of lending. b) The total outstanding (fund-based and non-fund
based) exposure is Rs.10 crore or above. Structure
Structure of CDR system

CDR system is having three tier structure :

CDR Standing Forum and its Core Group

CDR Empowered Group
CDR Cell