Prof. b.p.mishra.

XIMB , XUB.

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Recovery of Debts Due to Banks & Financial
Institutions Act, 1993

THE SECURITISATION AND RECONSTRUCTION OF

FINANCIAL ASSESTS AND ENFORCEMENT OF SECURITY
INTEREST ACT, 2002.

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The objective of the Corporate Debt Restructuring (CDR)
framework is 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 .

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This mechanism will be available to all borrowers engaged in any
type of activity subject to the following conditions :
a) The borrowers enjoy 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.

CDR system in the country will have a three tier structure :

CDR Standing Forum and its Core Group
CDR Empowered Group
CDR Cell

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Reference to Corporate Debt Restructuring System
could be triggered by
(i) any or more of the creditor who have minimum
20% share in either working capital or term
finance, or
(ii) by the concerned corporate, if supported by a
bank or financial institution having stake as in (i)
above.

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CDR is a non-statutory mechanism which is a voluntary
system based on Debtor- Creditor Agreement (DCA) and
Inter-Creditor Agreement (ICA). The Debtor-Creditor
Agreement (DCA) and the Inter-Creditor Agreement
(ICA) shall provide the legal basis to the CDR
mechanism.

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The CDR Empowered Group shall decide on the acceptable viability
benchmark levels on the following illustrative parameters, which may be
applied on a case-by-case basis, based on the merits of each case :

* Return on Capital Employed (ROCE),

* Debt Service Coverage Ratio (DSCR),
Gap between the Internal Rate of Return (IRR) and
the Cost of Fund (CoF),
* Extent of sacrifice.

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Broad benchmarks for the viability parameters :

i. Return on capital employed should be at least equivalent

to 5 year Government security yield plus 2 per cent.

ii. The debt service coverage ratio should be greater than

1.25 within the 5 years period in which the unit should
become viable and on year to year basis the ratio should be
above 1. The normal debt service coverage ratio for 10
years repayment period should be around 1.33.

iii. The benchmark gap between internal rate of return and

cost of capital should be at least 1per cent.

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iv. Operating and cash break even points should be worked out and
they should be comparable with the industry norms.
v. Trends of the company based on historical data and future
projections should be comparable with the industry. Thus behaviour of
past and future EBIDTA should be studied and compared with industry
average.
vi. Loan life ratio (LLR), as defined below should be 1.4, which would
give a cushion of 40% to the amount of loan to be serviced.

Present value of total available cash flow (ACF) during the

loan life period (including interest and principal)
LLR= ----------------------------------------------------------------------------
Maximum amount of loan

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 Joint lender forum
Before a loan account turns into a NPA, banks are required to
identify incipient stress in the account by creating three
subcategories under the Special Mention Account (SMA)
category as given in the table below:

SMA Subcategories Basis for classification

SMA-0 Principal or interest payment not overdue for more than 30 days
but account showing signs of incipient stress
SMA-1 Principal or interest payment overdue between 31-60 days
SMA-2 Principal or interest payment overdue between 61-90 days

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The Reserve Bank of India (RBI) has set up
a Central Repository of Information on Large Credits (CRILC) to
collect, store, and disseminate credit data to lenders. Reporting
that banks will be required to report credit information, including
classification of an account as SMA to CRILC on all their borrowers
having aggregate fund-based and non fund based exposure of Rs.50
million and above with them.

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Banks are advised that as soon as an account is
reported by any of the lenders to CRILC as SMA-2,
they should mandatorily form a committee to be
called Joint LendersForum (JLF) if the aggregate
exposure (AE) [fund based and non-fund based
taken together]of lenders in that account is Rs 1000
million and above. Lenders also have the option of
forming a JLF even when the AE in an account is less
than Rs.1000 million and/or when the
account is reported as SMA-0 or SMA-1.

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In case of restructured accounts where
the banks are converting at the time of restructuring,
Part of their liabilities to EQUITY of the corporate entity
and offering the management to a new promoter
/ group,SDR is applicable.

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A restructured account is one where the bank, for
economic or legal reasons relating to the borrower's
financial difficulty, grants to the borrower concessions
that the bank would not otherwise consider.

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1. Flexible Structuring of Long Term project Loans
to Infrastructure & Core Industries.- 5/25 SCEME
(DBOD No.BP.BC.24/21.04.132/2014-15 dated July,15,2014).

2.Strategic Debt Restructuring scheme.- SDR

(DBR.BP.BC.No.101//21.04.132/2014-15 dated june,8,2015)

3.Scheme for Sustainable structuring of Streessed asset S4S.

(DBR.No.BP.BC.103/21.04.132/2015-16 dated June,13,2016)

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Banks are unable to provide long tenor financing owing to
asset-liability mismatch issues.. After factoring in the initial
construction period and repayment moratorium, the repayment
of the bank loan is compressed to a shorter period of 10-12
years (with resultant higher loan instalments), which strains the
viability of the project,

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constrains the ability of promoters to generate fresh
equity out of internal generation for further
investments.
It might also lead to levying higher user charges in
the case of infrastructure projects in order to ensure
that greater cash flows are generated to service the
loans.
As a result of these factors, some of the long term
projects have been experiencing stress in servicing
the project loan.

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The long tenor loans to infrastructure/core industries projects, say 25
years, could be structured as under:

The fundamental viability of the project would be established on

the basis of all requisite financial and non-financial parameters.
Indicating capacity to service the loan and ability to repay over
the tenor of the loan;especially the acceptable level of interest
coverage ratio (EBIDTA / Interest payout).

Allowing longer tenor amortisation of the loan (Amortisation

Schedule), say 25 years (within the useful life / concession period
of the project) with periodic refinancing (Refinancing Debt Facility)
of balance debt, the tenor of which could be fixed at the time of
each refinancing, within the overall amortisation period;

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 25 years (Amortisation Schedule), but provide funding
(Initial Debt Facility) for only, say, 5 years with
refinancing of balance debt being allowed by
existing or new banks (Refinancing Debt Facility) or
even through bonds;

The refinancing (Refinancing Debt Facility) after each

of these 5 years would be of the reduced amounts
determined as per the Original Amortisation
Schedule.

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Only term loans to infrastructure projects, as defined under the
Harmonised Master List of Infrastructure of RBI, and projects in core
industries sector, included in the Index of Eight Core Industries (base:
2004-05) published by the Ministry of Commerce and Industry,
Government of India, (viz., coal, crude oil, natural gas, petroleum
refinery products, fertilisers, steel (Alloy + Non Alloy), cement and
electricity - some of these sectors such as fertilisers, electricity
generation, distribution and transmission, etc. are also included in
the Harmonised Master List of Infrastructure sub-sectors) - will
qualify for such refinancing;

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 The tenor of the Amortisation Schedule should not be
more than 80% (leaving a tail of 20%)

The bank offering the Initial Debt Facility may sanction

the loan for a medium term, say 5 to 7 years. This is to
take care of initial construction period and also cover
the period at least up to the date of commencement of
commercial operations (DCCO) and revenue ramp up.

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 Banks may determine the pricing of the loans at each
stage of sanction of the Initial Debt Facility or
Refinancing Debt Facility, commensurate with the risk
at each phase of the loan, and such pricing should not
be below the Base Rate of the bank;

Banks should have a Board approved policy for such

financing.

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 This would ensure long term viability of infrastructure/core industries
sector projects by smoothening the cash flow stress in initial years;

Banks would be able to extend finance to such projects without

getting adversely impacted by asset-liability management (ALM)
issues;

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 Banks could shed or take up exposures at different
stages of the life cycle of such projects depending
on banks single / group borrower or sectoral
exposure limits;

With reduction of project risk and option of

refinancing, ratings of such projects would undergo
upward revision.

Allowing lower capital requirement for banks as also

access to corporate bond markets to project promoters
at any stage based on such refinancing; etc.

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If the Initial Debt Facility or Refinancing Debt Facility
becomes NPA at any stage, further refinancing should
stop and the bank which holds the loan when it becomes
NPA, would be required to recognise the loan as such and
make necessary provisions as required under the extant
regulations.

Once the account comes out of NPA status, it will be

eligible for refinancing in terms of these instructions;

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 JLF/Corporate Debt Restructuring Cell (CDR) may consider
the following options when a loan is restructured:
Possibility of transferring equity of the company by
promoters to the lenders to compensate for their sacrifices;
Promoters infusing more equity into their companies;
Transfer of the promoters holdings to a security trustee
or an escrow arrangement till turnaround of company. This
will enable a change in management control, should lenders
favour it.

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 In many cases of restructuring of accounts, borrower companies are
not able to come out of stress due to operational/ managerial
inefficiencies despite substantial sacrifices made by the lending
banks.

The restructuring package should also stipulate the timeline during

which certain viability milestones (e.g. improvement in certain financial
ratios after a period of time, say, 6 months or 1 year and so on)
would be achieved.

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With a view to ensuring more stake of promoters in
reviving stressed accounts and provide banks with
enhanced capabilities to initiate change of ownership in
accounts which fail to achieve the projected viability
milestones, banks may, at their discretion, undertake a
Strategic Debt Restructuring (SDR) by converting loan
dues to equity shares.

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The decision on invoking the SDR by converting the
whole or part of the loan into equity shares should be
taken by the JLF as early as possible but within 30
days from the above review of the account. Such
decision should be well documented and approved by
the majority of the JLF members (minimum of 75% of
creditors by value and 60% of creditors by number);

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Post the conversion, all lenders under the JLF must
collectively hold 51% or more of the equity shares issued
by the company;

The share price for such conversion of debt into equity will
be determined as

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1.Conversion of outstanding debt (principal as well as
unpaid interest) into equity instruments should be at a Fair
Value which will not exceed the lowest of the following,
subject to the floor of Face Value
Market value
(reference date prior 10 days AVERAGE trading value)
Book value.

The JLF must approve the SDR conversion package within

90 days from the date of deciding to undertake SDR;

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The new promoter should not be a
person/entity/subsidiary/associate etc. (domestic as well
as overseas), from the existing Promoter/promoter group.

a. Banks should clearly establish that the acquirer does

not belong to the existing promoter group; and

b. The new promoters should have acquired at least 51

per cent of the paid up equity capital of the borrower
company.

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Eligible Accounts

For being eligible under the scheme, the account1 should meet
all the following conditions:
(i) The project has commenced commercial operations;
(ii) The aggregate exposure (including accrued interest) of all
institutional lenders in the account is more than Rs.500 crore
(including Rupee loans, Foreign Currency loans/External
Commercial Borrowings,);
(iii) The debt meets the test of sustainability- appointed by a
technical committee by IBA

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A debt level will be deemed sustainable if the Joint Lenders
Forum (JLF)/Consortium of lenders/bank conclude through
independent techno-economic viability (TEV) that debt of
that principal value amongst the current funded/non-funded
liabilities owed to institutional lenders can be serviced over
the same tenor as that of the existing facilities even if the
future cash flows remain at their current level. For this scheme
to apply, sustainable debt should not be less than 50 percent
of current funded liabilities.

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With the present cash-flow scenario , Banks to decide
The component of sustainable debt-A and convert
Unsustainable debt B either to equity or
equity equivalents securities.

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 Unlike CDR, S4S does not allow the banks to offer any
moratorium on debt repayment;

they are also not allowed to extend the repayment

schedule or reduce the interest rate.

The conversion of part of debt into equity or qausi-equity

instruments will be governed by valuation norms,
prescribed by the regulator.
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 If no change of Management, the promoters
have to dilute their shareholding
In proportion of the loss to the banks

lenders shall, therefore, require the existing promoters to

dilute their shareholdings, by way of conversion of debt
into equity /sale of some portion of promoters equity to
lenders, at least in the same proportion as that of part B
to total dues to lenders.
Including personal guarantee.
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1. The JLF/Consortium/bank shall engage the services of credible
professional agencies to conduct the TEV and prepare the
resolution plan.
2.The resolution plan shall be agreed upon by a minimum of 75
percent of lenders by value and 50 percent of lenders by number
in the JLF/consortium/bank.

3. At individual bank level, the bifurcation into Part A and part B

shall be in the proportion of Part A to Part B at the aggregate
level.

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a) An Overseeing Committee (OC), comprising of
eminent persons, will be constituted by IBA in
consultation with RBI. The members of OC cannot be
changed without the prior approval of RBI.
b) The resolution plan shall be submitted by the
JLF/consortium/bank to the OC.
c) The OC will review the processes involved in
preparation of resolution plan, etc. for reasonableness
and adherence to the provisions of these guidelines,
and opine on it.
d) The OC will be an advisory body.
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Asset classification as on the date of lenders decision to
resolve the account under these guidelines (reference
date) will continue for a period of 90 days from this
date. This standstill clause is permitted to enable
JLF/consortium/bank to formulate the resolution plan
and implement the same within the said 90 day period.

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The resolution plan and control rights should be
structured in such a way so that the promoters are not
in a position to sell the company/firm without the prior
approval of lenders and without sharing the upside, if
any, with the lenders towards loss in Part B. First Right
of Refusal by Lenders.

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The IBA will collect a fee from the lenders as a
prescribed percentage of the outstanding debt of the
borrowal entity to the
consortium/JLF/consortium/bank and create a corpus
fund. This fund will be used to meet the expenses of
the OC.

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Once the resolution plan prepared/presented by the
lenders is ratified by the OC, it will be binding on all
lenders. They will, however, have the option to exit as per
the extant guidelines on Joint Lenders Forum (JLF) and
Corrective Action Plan (CAP).

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 Finally, the banks will have to set aside money for
20% of the total outstanding debt or 40% of the debt
that is seen as unsustainable.

This is more than what banks typically need to

provide for bad loans15% in the first year.

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thanks

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