Banks are likely to set a timeline for the exit of distressed companies from the Corporate Debt Restructuring (CDR) mechanism.
This move is being considered as there are many cases of companies not exiting the CDR cell on one pretext or the other despite improvement in their operations and financial health. This is to avail themselves of the benefit of softer interest rates under CDR.
Bankers say some companies have not exited the cell for as long as seven to eight years, thus proving to be drag on precious resources.
One of the proposals doing the rounds is that the period of restructuring should be restricted to five years.
The CDR mechanism came into existence in 2001 to restructure debts of viable corporate entities affected by internal and external factors. A cell floated by banks and financial institutions screens and implements all corporate loan restructuring proposals.
If companies with good performance track record of more than three years do not exit the CDR mechanism, then banks are likely to charge them commercial rates of interest.
This will ensure that only deserving cases get the benefit of liberal restructuring terms under CDR.
Banks also plan to work out guidelines for the exit of companies from the CDR mechanism once their performance is better than CDR projections.
Provisioning requirement
Bankers say the Reserve Bank of India could enhance the provisioning requirement for restructured accounts classified as standard advances to 5 per cent from 2 per cent.
The enhanced provisioning requirement, whereby more capital will need to be set aside to cover possible defaults, will ensure that banks show urgency in the restructuring and exit of companies from the CDR process.
CDR in FY12
In 2011-12, corporate debt aggregating a whopping Rs 76,251 crore came up for restructuring. This was three times more than in the previous year.
Since inception, the CDR cell has approved close to 300 cases of corporate debt recast aggregating about Rs 1,69,000 crore.