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are giving below an Article which is based on hard core experience of a banker.
You will not find such things in any book (We assume that no other website has
such in-depth articles based on experience and well researched live examples
drawn from real life experience of a banker). We congratulate
Mr Subramanian for sharing his experience and making the young bankers rich.
I am sure, many bankers will get benefit and will be able to put across true
picture and understand the real implications while approving CDR packages.
If understood and implemented by the bankers dealing in this field in the right
spirit, I am sure it can save crores of rupees for the banking industry.
Remember, such knowledge is not easily available as experienced people do
not easily share their experience with newly recruited bankers.
The usual terms of an approved CDR package
Book Debts of longer period –
book debts older than 90 days are not considered for arriving at
the Drawing Power. However, where the Debtor is a Government
Department/Agency or a PSU, their dues that are up to 180 days old will
be taken into account for calculating the D.P. But under a CDR package,
this condition is further relaxed so as to include all trade debtors
which are old up to 270 days in case of dues from a government
department/agency or a PSU and up to 180 days in case of all other
extending the age of the acceptable Debtors, the lending banks take a
calculated risk because –
Debtor arises only after the sale of the finished product. In case of a
Service/Processing Unit, only after a particular transaction or a batch
of transactions is completed, the applicable fee/income falls due.
Therefore, as compared to stocks, debtors are more liquid and less
risky. Debtors are preferable also because a third party (buyer) comes
into the picture. It is quite unlikely that both the borrower (vendor)
and the third party (buyer) default together, at the same time.
other hand, by extending the age of the debtors, the realization period
gets extended and the operating cycle becomes greater. The borrower may
become slack in recovery of debtors that may ultimately lead to his
inefficiency in operations.
Reduction of margin on various funded facilities
of margin results in lower stake of the borrower. In each loan
transaction of the bank, the extent of the lender’s commitment will go
up and the borrower’s share will come down. This may lead to lesser
interest and motivation of the borrower to continue his activity with
the required briskness and care.
Waiver of margin on non-funded facilities
borrower’s stake is not there any loan transaction of the bank,
the borrower may show a lackadaisical attitude and may not be prudent
enough to conduct his business on healthy lines. Banks must be
extra-vigilant when demand for total waiver of margin comes from the
borrower. As compared to waiver, reduction in margin is recommended.
Extension of the Gestation/Moratorium period
may help the deserving borrower to concentrate better on his day to day
operations during the ‘start up’ period, it postpones the
recovery of the bank dues. So, the cash inflows of the bank get
Rescheduling of the existing Term Loans
Rescheduling is done by extending the repayment period, thereby reducing
the instalment amount. The borrower can service his interest
obligations more efficiently, because of reduced commitments on payment
of term loan instalments. While this may improve the ‘Debt Service Coverage Ratio’,
the ‘Interest Service Coverage Ratio’
is adversely affected. From the ‘Asset Liability Management’ point of
view, the lending bank has to redraw its further lending plans because
of reduced cash inflows.
Conversion of the unpaid interest on working capital facilities into
short term loans, in the form of ‘Funded Interest Term Loans’ (FITL)
the borrower to postpone his outstanding interest liability and he will
be freed from the burden of paying the interest dues in one stroke.
But, for the lending banker, his income is directly impacted. The
bank’s profitability will be affected owing to non-recovery of interest
due, coupled with the need for making necessary provisions in view of
the deterioration in the quality of the asset. Another important point
is, this kind of accommodating a defaulting borrower sets a bad
precedent and it will encourage many more delinquent borrowers to demand
conversion of unpaid interest into short term loans.
Waiver of interest from a particular date in the past
is one of the major sacrifices made by a lending bank in the CDR
Often, it is misused by the borrowers who have diverted bank’s money
for other purposes. Banks do not ordinarily agree to this kind of
demand from a borrower. But, due to some other considerations that
cannot not be made public, interest waiver for a particular period is
accepted by the lending bank.
Reduction of Rate of Interest – either prospectively or
of interest is often the result of hard bargaining by a borrower who
attempts to bring influence from all possible sources. Reduction of
interest is therefore not done on any scientific lines, as it shall be.
Conversion of compound interest into simple interest
lessens the interest burden of the borrower. While it will really be
helpful in case of past interest due, in case of future interest, there
is hardly any difference between simple interest and compound interest,
especially when the interest needs to be paid, as and when debited,
unless otherwise stated in the CDR package.
Sanction of additional finance in the form of Working Capital Term Loans
infuses greater liquidity for the short term needs of the borrower – to
finance current assets and to pay off current liability. Here, the
borrower is made to bring in additional margin upfront, ranging from 15%
to 25%. RBI is seriously contemplating to fix the minimum upfront
margin of the borrower at 25%.
Release of securities upon payment of a loan
is a very dangerous proposal.
Banks shall not agree to the request of the borrower to release
the most critical and important asset of very high value mortgaged to
them. It is a common knowledge that in case of multiple facilities, all
securities are all pooled together and charged to the bank covering all
the liabilities of the borrower, instead of taking various assets
facility-wise. The underlying rationale is the overall asset
coverage ratio shall remain intact, adequate and easy to calculate.
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securities upon payment of a loan(continued)
I wish to narrate two instances of blunder committed by Bank ‘A’ and
Bank ‘B’ in this connection.
had extended many facilities to one of its borrowers and among them was
a Housing Loan of Rs.3.00 Crores granted for construction of a
residential house costing Rs.4.00 Crores. The borrower was regular in
payment of the Housing Loan instalments and in course of time, the
liability in the Housing Loan account came down to Rs.1.60 Crores.
years from the date of sanction, all the loans of the borrower became
NPA. The borrower requested the bank for additional loan against his
housing property – either second housing loan or a mortgage loan. The
bank declined his request as it did not want to increase its exposure to
borrower offered to close his Housing Loan and Vehicle Loan
(Liability: Rs.8.70 Lakhs) and requested the bank to release the
title deeds of his house. In the meantime, the value of the land on
which the house was constructed shot up and the ruling market value of
the site and the house put together at that time was about Rs.9.00
Crores. Since the house was mortgaged only for securing the liability
in the housing loan account, the bank officials did not apply their mind
and acceded to the request of the borrower, because they thought they
could close two NPA accounts without any compromise and there were other
securities available to cover the remaining loans.
the other loans of the borrower continued to be NPAs with the aggregate
liability in them at Rs.11.00 Crores. These loans were secured by
agricultural lands (not commercial land) on which the borrower had his
manufacturing facility located inside a shed with asbestos roofing and
plant and machinery that have become obsolete in course of time. There
were some non-moving stocks and there were no proper records maintained
for the Trade Debtors.
The major mistakes committed by the bank ‘A’ were -
(a)It did not
pool up all the securities so as to cover all the loans;
(b)It did not
get the house valued afresh by an approved engineer, without blindly
going by the original cost of the house (in case of housing loans,
revaluation of the housing property every 2 years is not mandatory),
before releasing its title deeds and
to appreciate the fact that sale of agricultural land will not be
possible under SARFAESI Act, 2002.
while approving the CDR package of a borrower, released one security
against the cash payment of substantial amount by the borrower. Even
though the value of the other securities available was sufficient to
cover the remaining liability, as they were located in a remote area and
there was no proper access available, they could not be sold for want of
a suitable buyer. Without examining this aspect, one good security in
an urban centre was parted with by the bank.
Right to Recompense
drafting the sanction terms and conditions for an approved CDR, the
lending bank must be in a position to make a realistic assessment of the
situation and fix the probable time limit for the borrower to earn
sufficient profits to start repaying the bank debts. Accordingly, the
bank must specify it has the ‘right to recompense’ to make good
the sacrifices made by it, once the company becomes healthy after
rehabilitation. This must be explained in clear, unambiguous terms.
example, the lending bank must state it has got the right to –
pre-payment of some loans viz. FITL and short term loans
the repayment of Term Loans
higher margins as per the terms of original sanction
compound interest, in place of simple interest, from a particular date
the Rate of Interest, in tune with the original sanction
its right to convert some of the company’s debts into equity
its right to appoint the bank’s representative on the board of the
may even stipulate a condition that dividends cannot be paid by the company
out of its future profits, unless the loss/sacrifice made by the bank in
the past is made good.
care shall be taken that by exercising the ‘Right to Recompense’, the
company does not become sick again. Therefore, the bank must show
patience and study the situation at regular intervals of time, before
taking any crucial decision in this matter.
decision taken by the bank must be communicated to the borrower in
writing and his acknowledgement obtained, before going ahead with its
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