CDR Mechanism: Why Failed?

Corporate Debt Restructuring mechanism popularly known as CDR was devised by Reserve Bank of India way back about 15 years ago with the good intention to help the ailing companies in revival. The mechanism theoretically was quite favourable but the practical results from this mechanism are not upto the mark. Most of the CDR cases failed miserably due to impractical approach and the focus more on correcting the lenders’ books. Rarely any restructuring was done with a fresh positive approach towards reviving the unit. The rigid approach of lenders to structure the scheme beneficial to their own books without proper understanding the real problem of the borrower was one of the major factor.  Also it is noticed that the lenders did not fulfill their commitments in time making the scheme irrelevant.

CDR Schemes were mainly advised by the subsidiaries of the leading banks who are extended arm of the lenders only. It is conflict of interest and unethical. Such agencies were only taking care of their parents and more focused towards postponing the problem. It is worthwhile to mention that these subsidiaries minted huge amount of fees in the name of restructuring. The borrowers had to follow the instructions from their lenders to give the assignments to their own subsidiaries, pay hefty fees and still no material changes in the situation.  If, some data are collected to find out how much fees was paid to the advisors, MIs, lead bankers and CDR Cell, the figure will surely mind boggling. The borrowers too were keen to postpone the problem by couple of years and could not come forward with practical solution.

It so happened that the lenders indirectly played the role of consultants where no good can be expected from the borrowers’ point of view.  Infact, this was the most crucial stage when the borrowers needed proper solution to come out of the stress but unfortunately in most of the cases, they followed the lenders’ instruction for smooth but unviable restructuring. Once the scheme failed there was no one to help the ailing borrower and finally left to finish. Ultimately, such accounts are later assigned to ARCs for wiping out. Strangely, most of the ARCs are again extended arm of the lenders.

For better performance of this scheme, following steps should have taken:

i.             Restructuring proposal / scheme to be prepared by independent agencies not related to lenders or the borrowers;

ii.            The scheme should have been approved with in a fixed time frame i.e. not more than 6 months;

iii.           The implementation of the Scheme’s agreed terms and conditions within one month;

iv.          Agencies advising in the matter should have team from all the concerned segments;

Although, now the scheme is closed but the repercussion of this will remain for years to come. In my view, the lenders should not involve themselves into any other activities just to make money at any cost. RBI should restrict the lenders from indulging into such activities which are of “conflict of interest”  as these are mostly of disadvantage for the business.

“Please note that the above views are not against any particular institutions, lender, Bank, Financial institution or borrower. Also, I do not blame solely lenders for this failure but my views are towards the system which needs to be reviewed properly.”

NPA Feature: Excess Non-Productive Investments

While we continue to advise the clients who are in trouble and passing through serious stress , there are certain common features, noticed by us, which lead to stress. Although most of them are mentioned in my earlier posts, still wish to share my views on one more common reason of stress. It is most commonly noticed that the Balance Sheet or may be off Balance Sheet , disproportionate investment is made in to non productive fixed assets (i.e. Land and Buildings mainly)which are nowhere related to the Business and sole motive is to encash the valuation at later date. It is human nature to invest in real estate but excess investment  made out of the business funds can be disastrous . Such investment is done only for future valuation without any other logic. Though these investments look quite good but they take away the business funds and can not be termed as intelligent investment. These investments should be made only from the surplus own funds.

Once these non core investments are made the working capital dries out and thus path of stress is begins. Liquidity crunch wipes out profitability and account becomes irregular. In fact any undesirable investment can be dangerous. Liquidity has to be maintained in any case irrespective to the opportunities available to avail higher valuation. Lenders need to look into such issues seriously as this can be the beginning of dark days ahead. However some times lenders promote such investment as this increases asset coverage but the loss is much higher than the security.

We noticed that higher the undesirable investment , sooner the stress. Such investments made for safeguarding the future of the business is in fact poison for the enterprise. It should be avoided in any case specially if made from the borrowed funds.

Stressed Accounts: Role of Promoters’ Family

When going is good , everything looks good. The society, Relatives, Friends, Peers, Employees and Colleagues give lot of respect and applause. Everything goes so smooth and fast that it is impossible to imagine about the possible tough time. As called quite often ‘the Charity and challenges begin from home’, exactly same thing happens in business too when the turbulent time starts. Our own people start  doubting the capabilities and even the past achievements. The promoters gradually get replaced by new set of people who are not very positive. Everything is doubted and non communication becomes the most popular tool. Generally it is experienced that the doubts on the capabilities of the promoters lead to fear and hence the situation starts deteriorated day by day. The Bankers ask certain information, Data and explanation which are perceived to be potential threat for the borrower , who , out of fear , either avoids or gives wrong information. The cascading effects of one misinformation is so much that very soon both borrower and lender who are basically partners part ways and start taking actions which is in their short term interest. No one is concerned about the unit, its’ employees and other stake holders. The situation becomes so worse that the unit which was bread & Butter for all becomes a liability and planning starts for getting rid of that poor sick unit.

Family members of the promoter are one of the key stake holders and hence their role is very important in deciding the fate of the stressed units. It is very easy to discard an ailing unit which is not generating any more revenues but to revive, a lot of guts and hard decisions needed. An ailing unit , if treated as family member by the promoter, has great potential to revive. In general, it is noticed that the wealth generated by the unit which is not doing well now, has only one way. Neither promoter nor his family would ever return back ,even a very small part of such wealth, to revive the unit. No one would ever part with the luxury for a short period and that is the basic reason in lot many NPA cases. If the promoters’ family alongwith other stake holders put complete faith in the troubled entrepreneur, the probability of revival is very high. There is no system to involve the family members in ailing unit as the communication is always in legal language by the lenders and hence nothing revives.

Although mistakes are bound to happen but  Nobody is going to repeat the same mistakes next time if chance given. Business has uncertainty as its’ basic character but that given fun too.

In my view, the recovery process should be avoided to the maximum possible and the lenders should start communicating with other stake holders. If proactively handled, the unit has some probability of revival. Family members if ascertained properly can play a very important role in coming out of the tough situation. A promoter with established track of entrepreneurship can definitely bounce back if chance given and intentions are good.

Please don’t mistake me that all the promoters have good intentions. 

Stressed Accounts: Challenges in Restructuring/Revival

Once an account enters into stressed by way of SMA0, SMA 1 & SMA 2 and then doubtful, substandard and Loss account, the journey is too short and it is like a milking cow getting old and useless . The situation and condition for that matter worsens too fast. It does not take more than 9-12 months before account totally branded as NPA.

A stressed account needs immediate attention and lot of care to handle otherwise and mostly it ends as a loss account with no hope to revive. After some legal battles, the units goes in the hands of typical businessman who deals in scraps. It is really quite painful to see a unit being grounded which till very recently was centre of activities.

There are few options left once the account is in stress depending upon the business potential, asset value, promoters’ confidence in the business and lenders’ trust in the promoters. While disposal of the unit is quite easy and there are many agencies who are expert in that, few cases are revived with lot of efforts. Revival or Restructuring is quite common at the first stage in our Indian banking system but this is not without hurdles and challenges. Let me share my views on these challenges, which you may have also experienced:

      1. Acceptance of Revival /Restructuring Plan: In most of the cases first draft of revival plans  is always rejected by the bankers/lenders.   Lenders take lot of time 3-6 months to give patient hearing to revival plans unless there is some time constraint. The revival plans also get delayed due to impractical approach of the lenders and the borrowers both. Lenders often don’t look at the plan with practical approach , rather they are more concerned with the set banking norms which have already failed in such cases. Borrowers too feel that this is one more opportunity to screw the banks further and demand as much as possible from lenders.  By the time both sides come to the reconciling stage it is delayed by 6-9 months. This delay causes highest damage to the bleeding borrower.

     2.  Infusion of Funds by Lenders and the Borrower: Once the revival plan is accepted, the commitments of additional funding made by both the sides  become one more challenge. Borrowers find it too difficult by this time bring in additional funds in the business which is either not there or stuck up somewhere. Lenders too take long time in convincing themselves to infuse funds. In many cases , it is noticed that such addition commitments  by the lenders never come in the business and it is adjusted against interest and other dues already outstanding or to be due in near future. To keep their record clear the lenders defer such infusion .

        3. Valuation and Viability:  Although the valuation of asset is always done by the empanelled valuers, it is quite commonly noticed that valuation at the time of borrowing is much higher as compared to the valuation while restructuring the loan. It is beyond my understanding why the lenders don’t get the three type valuation (Market value, realizable value and distress value) while lending. Why it should be made compulsory that the lending should be done considering the distress value as one of the factor. Further another key issue is the viability of the unit for revival. This is also done by the empanelled agencies but the studies are not carried out properly. The delay and misconception can lead to wrong decision.

        4. Over commitment by the Borrower: Biggest  challenge in the revival is the over commitment by the borrower who is more interested to buy time . Very few cases have seen the timely fulfillment of commitments by the borrower made in revival.

     

      In my view, both the lenders and borrowers try to pass on the bucks and buy time so   the problem is passed on to some more months. If proper revival plans are prepared with honest intentions, there will be great possibility of revival. Also the timely decision by the lenders can help the stressed account to revive. In last one year RBI has come out with two major schemes i.e. 5/25 and SDR. It is working on some more steps to handle the situation of stress accounts but success will be only when both sides understand the situation properly and timely. RBI should consider the views of the entrepreneurs without blaming only to them, similarly lenders should also improve their accountability system and make good use of the tools available with them to handle stressed accounts.  Sometimes a cow can be ill which does not mean it can’t be cured. Lenders are major financial partners and have all authority over the borrower but this brings lot of responsibility on them.

    

    Friends, I never intend to side the willful defaulters or fraudsters but believe that sometimes lenders are party to such defaults and hence to some extent responsible for such situation.

Non Performing / Stressed Account: Role of Consultants

When an account is high rated and well performing, there are many options and opportunities to the unit and the promoters. The money flows in and there is always a que of investors. New Bankers source various ways and means to take exposure in the account and existing bankers not only try to resist the entry of new lenders but also use every ways and means to increase the exposure.  Even the existing consultants use every trick to oust the new consultants and create a mystery curtain around the promoter  to safeguard their existence.  The money is sourced easily and that is one of the key factor for turning account into stress at a later stage. Promoters start adventuring beyond their capacity and without much analysis. A single wrong business decision spoils the party. This golden situation gradually fades away and the account enters into stress zone. Soon it turns into NPA and then new journey starts.

The consultants and advisors who served such clients in good time are generally not very supportive at this stage. I wish to share my views on the Role of Finance Consultants in case of stressed accounts.  The expertise and experience of handling stressed accounts is not very common. Very few Finance consultants enter into such advisory services. The consultant has to associate with such accounts for quite long time as it takes 12-24 months time to resolve such accounts. There are legal, financial and technical issues which hound the units badly. Hence strategy to handle situation is key of the game. Most of the events go unnoticed and the performance of the consultants can not be visualized due to long drawn process. Other side the fee realization is also quite challenging due to stress in the unit. Thus it needs lot of patience to handle such accounts. Unlike the consultancy in sourcing of finance , this advisory of handling stress cases does not bring substantial funding. Only achievement is handling the lenders, working out  of strategy to survive and move forward .

The general perception is that consultant is needed to raise finance whereas the fact is that the advisory services are of utmost importance during the crises or stress for that matter. Any step without proper advice may be disastrous for the unit. It is just like we need better doctor or even surgeon when the disease is more crucial. I fail to understand why the promoters of stress units do not think in this direction. To worse the matter, it is noticed that the management of such units become more knowledgeable in the matters of handling  legal and financials. 

Distressed Units- Some suggestions to Revive

UPA was ruling the country since 10 years in beginning of 2014 without any major challenges and the last 3 years had witnessed policy Paralysis. The country could not see any vibration as if every thing was left to the hands of God. Inflation was continuously increasing and people were simply waiting for this government to go as there was no effect on the deaf ears of the leaders in power. After long wait new government, NDA, came into power amidst lot of cheers and hopes. The business fraternity was expecting positive view and support from the new rulers. Though they were taking issues on priority, it was long wait till first boost up came in the form of interest rate reduction of .25 bps. We lost golden opportunity of cheaper crude prices to boost the morale of the business community. In fact in last decade, there had been lot of challenges to the industry causing severe losses due to macro factors. Many small and large business houses defaulted to the loans borrowed from banks and institutions. There may be some cases of willful default, fraud or cheating but maximum businesses defaulted due to the circumstances beyond their control. Situation though did not deteriorate after NDA government came into power but nothing much is done so far to life the suffering businesses. Rather the same tune is being sung by the new team too. Blaming only and only entrepreneur for the default has become the fashion in finance world. I am of the opinion that still there is great potential to save the bleeding organizations if some proactive approach is adopted.

I suggest following measures immediately which can not only revive the economy at grass root level but also save the jobs of millions serving in private sector:
1. Those industries reeling under severe financial crunch but still operating somehow shall be immediately helped by extending fresh funding if possible or by restructuring their loans. The terms may stringent enough to stop further financial losses to the lending institutions. Recent RBI guidelines towards Strategic Debt Restructuring (SDR) Scheme may be implemented to control the stressed units.
2. Industries operating but NPA , SHALL BE given MINIMUM SIX MONTHS' moratorium towards repayment of interest and principal. This will help them stand on their own.
3. No new account shall be categorised as NPA for next nine months. Such borrowers can arrange funds on their own to avoid being branded failure under CIBIL and come out of the current tough situation.
4. Role of ARC shall be reviewed as they have caused more loss to the economy then any benefit. These were floated to help business revive but rarely any account has been revived by them. They behave like vultures where they can get 24-30% pa return on their meager investment. There should be detailed enquiries on the accounts taken up by them ( In the year 2014-15, they have acquired more than 50k Crs. defaulting loans from Banks) by paying hardly 10% to the bankers. In fact the bankers prefer ARCs instead of helping the borrower as this relieved them from any accountability.
5. Government should think seriously on building up an institution to restructure and rehabilitate the distressed units. A fund should be created separately instead of giving support to the bankers who use such funds to lend further.
6. MSME segments needs immediate relief from interest rates. 

    Above all there should be trust between lenders and borrowers notwithstanding the fact that some of the borrowers have defrauded the lenders but number of such borrowers is not more than 5%, however in value terms it may be 15-20%. Big borrowers have given big hit to the lenders, while small borrowers suffered most. If serious steps not taken to boost the confidence of promoters, the fear of depression and unemployment can come true. The revival may not only boost economy but give new jobs to millions. 

Strategic Debt Restructuring (SDR)- Post 2

Recently I  had written about new RBI guidelines about Strategic Debt Restructuring (SDR) Scheme, where in the lending banks are authorised to convert the loan into equity and take management control of the borrowing company . This step can prove to be a milestone for managing the continuously growing NPA. The effect of this step may be tremendous if the banks really exercise this power very judiciously. Post conversion into equity, the bankers can outnumber the board and then also take the signing powers in their control. Even major business decisions can be taken for the good of the company. Although it looks a very good ammunition in the hands of the banks, it would be fruitful only if the banks have good team to manage the Unit. Banks should be open to outsource the agencies who are capable to provide such turnaround services . The professional team can definitely turnaround such distressed unit and later can be sold to new investors. This route is better than any other route of disposal of stressed assets to recover the loan. For professionals , this offers good business opportunity.

In fact, banks should take certain steps to control the borrower at the initial stage only while sanctioning the loans to avoid the non performance of the account which may include :

1. Pledge of full equity with the automatic transfer clause in the event of default.

2. At least one board representative to monitor the company operations.

3. Proportionate release or charge on shares based on the recovery and additional loans.

However above conditions may be relaxed in case of high rated units. More about the SDR scheme  soon.