............An Honest View of Learned Bankers


Follow AllBankingSolutions


    Follow allbanking on Twitter


Some points to ponder on ‘Corporate Debt Restructuring’ (CDR) 

Ads by Google



V Subramanian



What is ‘Corporate Debt Restructuring’ (CDR)?


By CDR, we mean rescheduling the loans taken by a corporate entity.  The CDR package may include several components such as –

(a)  Acceptance of Debtors (Book Debts) of longer period for the purpose of calculation of Drawing Power

(b)  Reduction of margin on various funded facilities

(c)  Waiver of margin on non-funded facilities

(d)  Extension of the Gestation/Moratorium period

(e)  Rephasement of the existing Term Loans

(f)   Conversion of the unpaid interest on working capital facilities into short term loans, in the form of ‘Funded Interest Term Loans’ (FITL)

(g)  Waiver of interest from a particular date in the past

(h)  Reduction of Rate of Interest – either prospectively or restrospectively

(i)    Conversion of compound interest into simple interest

(j)    Sanction of additional finance in the form of Working Capital Term Loans (WCTL)



Why is CDR resorted to?


Both the lender and the borrower are under some sort of financial pressure/compulsion to go in for CDR.   In case of a lender, CDR helps him to reduce his impaired assets and to reduce the consequential provisions.  In case of the borrower, CDR gives him the much needed respite from all the existing and impending financial commitments in the form of servicing of interest and repayment of term loans.







Ads by Google


What is the difference between ‘Right to Compensation’ and ‘Right to Recompense’?


In case of ‘Right to Compensation’, it arises when one party suffers injury, loss or damage on account of someone else’s action – wilful or unintentional – and failure to perform an obligation mutually agreed upon.   It is very similar to ‘Indemnity’.  Here, the parties may or may not have known each other prior to the occurrence of the cause that triggered the demand for compensation.  It is legal right as per Indian Contract Act, 1872.  The extent of compensation is not pre-decided, because all the possibilities of loss or injury and their magnitude cannot be pre-conceived.


In case of ‘Right to Recompense’, this right is pre-decided between a lender and a borrower (usually a corporate entity), at the time of drafting and implementation of a rehabilitation package.  Here, the compensation for the loss or sacrifice of the lender depends on the performance of the borrower following the implementation of the CDR package.   Here, the ‘right to recompense’ is not absolute, as it is conditional on the performance of the borrower.


‘Right of Recompense’ is stipulated invariably in all CDR cases, where large sacrifices are envisaged from the lenders.  The quantum, nature and timing of recovery are all examined for the purpose of giving a well defined formula to the borrower, so that the clause does not remain open ended.   Thus the terms of CDR sanction are made very clear in advance and there can be no dispute or wrong interpretation at a later date.


All CDR approved packages must incorporate lenders’ right to accelerate repayment and borrowers’ right to pre-pay.  The right of recompense should be based on certain performance criteria to be decided by the CDR Standing Forum.


As per the extant disclosure norms of RBI, only the following details are mentioned under ‘Notes on Accounts’ forming part of the annual published ‘Balance sheet’ of the lender:

(a)  No. of loans restructured (b) Amount restructured  and (c) Amount of sacrifices made


But the major lacuna here is the names of the companies assisted under restructuring and the relevant details of each restructuring are not made mandatory.  Therefore, in the absence of these specific details (especially with regard to the promoters), the stigma once upon a time attached to ‘Corporate Debt Restructuring’ is no longer in existence.  The companies assisted under CDR and its promoters do not feel shy now to approach the other financial institutions for obtaining cheaper cost of funds under ‘refinancing’ or ‘take over’.  In other words, assistance received under ‘Corporate Debt Restructuring’ is no longer a disqualification for a company when they approach other banks/financial institutions.


I append below 2 relevant articles published in ‘Times of India’ and ‘The Indian Express’.




The CDR mechanism has come in for sharp criticism from none other than the Reserve Bank of India. In a recent speech, RBI Deputy Governor K C Chakrabarty said: While clearly there is cause for concern given the pace and quantum of restructuring over the last few years, the concerns are aggravated by the fact that the restructuring is neither being permitted in a transparent and objective manner by banks.... Nor is it being resorted to in a non-discriminatory manner. A RBI working group has recommended new tighter norms on restructuring, including higher contribution from promoters to ensure their full commitment, a personal guarantee from the promoter which cannot be replaced with a corporate guarantee, higher provisioning by banks on restructured loans and the changes to the way banks are recompensed following a successful restructuring.


-       Times of India




Banks have decided to tighten guidelines governing corporate debt restructuring (CDR) following complaints that promoters are abusing the CDR mechanism.

Bankers have proposed higher equity infusion — to the tune of one-fourth of the CDR demand — by the promoters, timeline to exit from the CDR system, board representation, management changes and higher interest rate of not less than the base rate to CDR companies. "We have decided to demand higher capital infusion to the tune of 20-25 per cent of the CDR amount being sought by the promoters of companies that seek loan revamp, from the current 15 per cent. However, no final decision has been taken," State Bank of India Deputy MD Soundara Kumar said after a meeting of the CDR cell of banks.

They also suggested the methods of recompense amount and pre-determining the exit clause for CDR companies since some firms do not want to come out of the CDR. Banks also wanted to set the interest rate for recast loans at not less than their base rates. Currently, as banks are offering very low interest rates, they are suffering losses on CDRs.

Bankers also discussed the need for demanding board representation on the companies that go in for CDR, Central Bank of India executive director R K Dubey said, adding that the meeting also called for suggestions from banks on revamping the entire CDR mechanism. Another proposal was to demand personal guarantees from the promoters, so that better accountability can be expected, apart from ensuring that if a change in management is required it can be done easily. There was also a call for making the promoters pledge their entire holdings in the company that is seeking CDR.

Dubey said there was consensus among the bankers that margins should be brought upfront and it should be increased. These suggestions come in light of the fact that bankers are increasingly losing money on the CDR and now that they have the government with them, they want to trim their losses. Another suggestion is that if a promoter is suspected of diverting funds, his case should not be entertained for CDR.

Dubey said these suggestions will be submitted to the RBI and Finance Ministry. Given the fact that Finance Ministry is not happy with the way CDR mechanism is being used by various companies, there was a broad consensus on the need for a fresh set of guidelines for CDR. However, they said nothing has been finalised.

-       The Indian Express

Some important links:


  4. › ... › Business Today  SPECIAL  Dec 9, 2012
  6. › Topics
  9. › Collections  Lenders

ontent content content


You can give your feedback / comments about this Article.   Please give only relevant comments as irrelevant comments are waste of time for yourself and our other readers.



blog comments powered by Disqus