Restructure of Advance Accounts

Restructuring would normally involve modification of terms of the advances / securities, which would generally include, among others, alteration of repayment period / repayable amount / the amount of installments / rate of interest (due to reasons other than competitive reasons). It is applicable to all type of credit facilities including working capital limits extended to Industrial Units, provided they are fully covered by Tangible Securities. No account will be taken up for restructuring by the banks unless the financial viability is established and there is a reasonable certainty of repayment from the borrower, as per the terms of restructuring package. The viability should be determined by the banks based on Return on Capital Employed, Debt Service Coverage Ratio, Gap between the Internal Rate of Return and Cost of Funds etc., on case-by-case depending merits of the account. Any restructuring done without looking into cash flows of the borrower and assessing the viability of the projects/activity financed by banks would be treated as an attempt at ever greening a weak credit facility and would invite supervisory concerns/action. The accounts not considered viable should not be restructured and banks should accelerate the recovery measures in respect of such accounts.

Restructuring of advances could take place either before commencement of commercial production/operation; or after commencement of commercial production / operation but before the asset has been classified as Sub-standard or Doubtful. Accounts that are restructured for the second time or more on account of natural calamities would retain in the same asset classification category on restructuring. Hence, restructured accounts on account of natural calamities would not be treated as second restructuring.

Corporate Debt Restructuring (CDR): The objective of the CDR framework is to preserve viable 68ttest68ed that are affected by certain internal and external factors and minimize the losses to the creditors and other stakeholders through an orderly and coordinated restructuring programme, outside the purview of BIFR/DRT and other legal proceedings, for the benefit of all concerned. The scheme will not apply to accounts involving only one financial institution or one bank. The CDR mechanism will cover only multiple banking accounts/syndication/consortium accounts of corporate borrowers with outstanding fund-based and non-fund based exposure of  10 crore and above by banks/financial institutions. However, there is no requirement of the account/company being sick, NPA or being in default for a specific period before reference to the CDR system. CDR is a non-statutory mechanism which is a voluntary system based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA). Three-tier structure is in place for CDR system.

CDR Standing Forum provide an official platform for both the creditors and borrowers (by consultation) to amicably and collectively evolve policies and guidelines for working out debt restructuring plans in the interests of all concerned.

CDR Empowered Group considers the preliminary report of all cases of requests of restructuring, submitted by the CDR Cell. After the Empowered Group decides that restructuring of the company is prima-facie feasible and the enterprise is potentially viable in terms of the policies and guidelines evolved by Standing Forum, the detailed restructuring package will be worked out by the CDR Cell in conjunction with the Lead Institution.

CDR Cell undertakes the initial scrutiny of the proposals received from borrowers / creditors to decide whether rehabilitation is prima facie feasible. If found feasible, proceed to prepare detailed Rehabilitation Plan with the help of creditors and, if necessary, experts to be engaged from outside. If not found prima facie feasible, the creditors may start action for recovery of their dues.

CDR-1 system is applicable only to accounts classified as ‘standard’ and ‘substandard’. CDR-2 system is applicable to the accounts where the projects have been found to be viable but classified under ‘doubtful’ category provided minimum of 75% of creditors (by value) and 60% creditors (by number) satisfy themselves of the viability of the account and consent for such restructuring.

Reference to Corporate Debt Restructuring System could be triggered by any one or more of the creditors who have minimum 20% share in either working capital or term finance, or by the concerned corporate, if supported by a bank or financial institution. However, in case of suit filed accounts at least 75% of the creditors (by value) and 60% of creditors (by number) shall consent for the proposal. Under CDR, banks extend the repayment period or moratorium on repayment or reduction of interest rate on loans or combination of any of the above.

As per recent RBI guidelines, the promoters’ are required to bring minimum of 20% of banks’ sacrifice or 2% of restructured debt, whichever is higher. The promoters’ sacrifice should invariably bring upfront while extending the restructuring benefits to the borrowers. It is mandatory to obtain promoters’ personal guarantee while extending restructuring benefits to the borrowers.

Existing guidelines allow regulatory forbearance on asset classification of restructured accounts subject to certain conditions i.e. standard accounts are allowed to retain their asset classification and NPA accounts are allowed not to deteriorate further in asset classification on restructuring. The asset classification benefit is also available on change of date of commencement of operation for projects under infrastructure sector as well for projects under non-infrastructure sector. The accounts classified as NPA on restructuring should be upgraded only when all the outstanding loans/facilities in the account perform satisfactorily during the specified period i.e. one year.

Take-out Finance – The scheme has been designed to enable lenders to address the concern of the hitting the sectoral limit, asset-liability mismatch and liquidity issues that may arise by the long-term debt financing to core projects. Under the scheme, banks and lenders can enter in an arrangement with financial institutions for transferring the loan outstanding in their books to those of the financial institution which is taking out long-term debt. The tenor of the take-out finance is up to 15 years. The sectors eligible for Take-out finance are Road and bridges, Railways, Seaports, Airports, Inland waterways and other transportation projects; Power, Urban transport, water supply, sewage, solid waste management and other physical infrastructure in urban areas; Gas pipelines Infrastructure projects in SEZs, International convention centers and other tourism infrastructure projects. It is one of the emerging products in the context of funding of long-term infrastructure projects. Under this arrangement, the Banks financing infrastructure projects will have an arrangement with other financial institutions for transferring to the latter the outstanding in respect of such financing in their books on a pre-determined basis. The norms of asset will have to be followed by the concerned banks in whose books the account stands as balance sheet item as on the relevant date. The lending institution should also make provisions against any asset turning into NPA pending its takeover by the taking over institution. As and when the asset is taken over by the taking over institution, the corresponding provision could be reversed. At present IIFCL is providing a Take-out finance window to the banks in India.