RBI expands CDR system to reduce bad loans

In order to make the decision making process more equitable, RBI, in its draft guidelines on CDR, has incorporated the requirement of support of 60 per cent of creditors by number in addition to the support of 75 per cent of creditors by value.

Banks have already taken up loans worth Rs 61,766 crore under the CDR mechanism. If a defaulter’s CDR proposal is approved, he will get concessions like interest waiver, write-offs, rollover of repayment etc. ‘‘Banks should ensure that CDR system is not misused by corporates. Some corporates have already misused the CDR route to remain out of the NPA books,’’said a banking source.

The draft norms hold out a warning to banks, especially to foreign banks. It says in order to ensure discipline in the CDR mechanism, members of CDR may jointly or severally decide that those banks which have not joined the mechanism as members would not be eligible for future consortium/syndication arrangements for lending.

For this purpose, a collective action clause may be incorporated in the loan agreements involving multiple lenders whereby all lenders agree to abide by the majority decision for restructuring of the account in case of need.

If 75 per cent of creditors by value and 60 per cent of the creditors in number, approve a restructuring package of an existing debt (i.e., debt outstanding) under CDR mechanism, it should be binding on the remaining creditors.

In deserving cases, the Core Group may review the reasons for classification of the borrower as wilful defaulter and satisfy itself that the borrower is in a position to rectify the wilful default provided he is granted an opportunity under the CDR mechanism. ‘‘Such exceptional cases may be admitted for restructuring only with the approval of the Core Group. The Core Group may evolve policies and safeguards for dealing with cases of wilful default,’’RBI said.

This is in sharp contrast to extant instructions, whereby, in no case, requests of any corporate indulging in wilful default, fraud or misfeasance even in a single bank will be considered for restructuring under the CDR mechanism.

Equity acquired by way of conversion of debt/overdue interest under the CDR mechanism is allowed to be taken up without seeking prior approval from RBI even if the capital market ceiling is breached, subject to reporting such holdings to the central bank every month along with the regular statement. However, banks will have to comply with the provisions of Section 19(2) of the BR Act.

This section states that an FI, with equity investment in companies in excess of 30 per cent of the paid up share capital of that company or 30 per cent of its own paid-up share capital and reserves, whichever is less, on its conversion into a universal bank, would need to divest such excess holdings to secure compliance with the provisions of Section 19(2) of the Banking Regulation Act, which prohibits a bank from holding shares in a company in excess of these limits.