Corporate Debt Restructuring (CDR) Mechanism in India:

Corporate Debt Restructuring (CDR) is a mechanism to revive doubtful corporate loans in order to
ensure safety of money lend by the banks and financial institutions through timely support by
restructuring the loans.
It is a voluntary non-statutory system based on Debtor-Creditor Agreement (DCA) and Inter-Creditor
Agreement (ICA). CDR mechanism was evolved and detailed guidelines were issued by Reserve bank
of India in consent with government and financial institutions on August 23, 2001 for
implementation by financial institutions and banks. These guidelines on CDR were subsequently
reviewed and revised on the basis of recommendations of a High Level Group and current
comprehensive guidelines on CDR as well as non-CDR restructuring were issued in August 2008.

The main objectives under this mechanism are as follows:
To ensure timely and transparent mechanism for restructuring of corporate debts of viable
entities facing problems, for benefit of all concerned
To aim preserving viable corporates that is affected by the certain internal and external
factors
To minimise losses to the creditors and stakeholders through an orderly and co-ordinated
restructuring program.
The restructuring of a companys outstanding obligations, habitually attained by:
Providing concessions in payment and waiving part of interest
By converting the un-serviced portions of interests into term loans through reduction in
margins
Reassessment of credit facilities including working capital
Restructuring the management
Reduction in equity capital to make more capital available for expansion
Conversion of debentures into equity to give relief on the compulsory payment of interest
on the debentures etc.

Trend Analysis: The thought to introduce CDR was to help sinking corporates if they fall under viable
category. However, in recent years CDR comes under scanner due to extraordinary rise in the
number and volume of advances being restructured under the scheme. Statistical trends for CDR are
as follows:

Table1: Trends in Restructuring:
Particulars Mar-09 Mar-10 Mar-11 Mar-12 CAGR (%)
Gross Advances (Rs. Crore) 27,53,365 32,27,287 39,82,954 46,55,271 19.13
Restructured Standard Advances
(Rs. Crore) 75,304 1,36,426 1,37,602 2,18,068 42.54
Ratio (%) 2.73 4.23 3.45 4.68
Source: RBI

Trend for restructuring shows that Gross advances and Restructured standard advances grew at a
healthy rate of 19.1 per cent and 42.54 per cent from Mar 09-Mar 12. Gross advance grew highest
during 2011 at 23.44 per cent y-o-y, while restructured standard advances grew highly in 2010 and
2012 by 81.17 per cent and 58.4 per cent respectively.





Table 2: Trends in Restructuring across Banks:
Particulars
2009-10 2010-11 2011-12
Gross
Advances
Restructured
Standard
Advances
Gross
Advances
Restructured
Standard
Advances
Gross
Advances
Restructured
Standard
Advances
All Banks 17.21 81.17 23.41 0.86 16.88 58.48
Public Sector
Banks
19.81 96.59 22.98 3.86 16.02 58.33
Private Sector
Banks
12.8 5.6 26.6 (-)28.48 20.65 67.35
Foreign Banks (-)1.38 (-)25.06 19.06 (-)27.56 16.35 (-)23.76
Source: RBI

Ratio of Restructured standard advances to gross advances (%) across Industries:

Source: RBI

If we see the exposure of banks towards restructuring, public banks are way ahead of private and
foreign banks which shows that large number of restructuring cases are handled by public banks.
During March 09 to March 12, Ratio (Standard advances to Gross advances) for banks grew at a
CAGR of 24 per cent while for private and foreign banks it was at (-10)per cent and (-33) per cent
respectively. This show that among all banks high risk of restructuring is associated mostly with
public banks.

Table 3: Trends in Restructuring across sectors:
Particulars 2009-10 2010-11 2011-12
Segments
Gross
Advances
Restructured
Standard
Advances
Gross
Advances
Restructured
Standard
Advances
Gross
Advances
Restructured
Standard
Advances
Agriculture 25.74 64.91 15.65 11.16 15.09 20.74
Industries 24.14 93.87 26.96 (-) 0.23 19.52 64.7
Services 29.02 79.91 31.99 35.67 20.74 134.34
Others 1.08 49.37 16.78 (-) 14.80 11.2 (-) 16.04
Total 17.21 81.17 23.41 0.86 16.88 58.48
Source: RBI


3.03
4.97
4.2
5.73
2.19
2.05
1.16
1.61
0.73
0.55
0.34
0.22
0
1
2
3
4
5
6
7
Public Sector Banks Private Sector Banks Foreign Banks
March 2012 March 2011 March 2010 March 2009

Table 4: Ratio of Restructured standard advances to gross advances (%) across sectors

Source: RBI

The above table shows that within sectors, Gross advances and Restructured standard advances for
Industry sector is predominantly higher at 8.24 per cent (with medium and large industries sector
being at 9.34 per cent) and at a CAGR of 19 %. Ratio for agriculture stood at 1.45 per cent, while that
for services stood at 3.99 per cent (with micro and small services being 0.94 per cent).
Challenges:
Need of ethics: In past few years number of cases and volume of loans for debt restructuring
had grown enormously. The problem arise because, CDR mechanism have not been used
very ethically and judiciously. Hence, to follow CDR in ethical way is still a challenge for
Banks and financial institutions.
Constraints of time and skills: further, lenders have to rely on the due-diligence done and
certificates given by external professionals which create a lack of transparency in the
restructuring process.
Other issues: Excessive leveraging by borrowers, coupled with slowdown in the economy
which some time results into restructuring benefit for an unscrupulous borrower with an
unviable account.

Road ahead: In 2012, banks were approached for debt restructuring in a record 126 cases and
collective amount of Rs 84,000 crore which shows sign of concern in terms of growing bad debts for
banks. To overcome these issues, Reserve Bank of India (RBI) has sharply raised the provisioning
requirements for restructured loans of banks to 5 per cent from existing 2.75 per cent. The new
guidelines say that, for accounts restructured prior to March 31, banks would have to make
provision of 3.75 per cent in the first phase effective March 31 2014. And in the next phase, it will
be 5 per cent with effect from March 31, 2015. Central bank has also asked banks to give
information on restructured advances in their annual balance sheets separately for both stressed
and satisfactory performance account which is expected to create transparency in the system.
Further, restructuring is an instrument for helping troubled segment of the economy to overcome
difficulties and make control over indefinite circumstances. Restructuring was brought for the
larger benefit of the economy and the society; it should be available to all types of lender in a
timely and non-discriminate manner. This can be achieved by developing necessary structures,
systems and processes and by following necessary objectives.
1.1
1.44 1.38 1.45
4.87
7.6
5.98
8.24
1.43
2 2.05
3.99
1.78
2.62
1.91
1.45
0
1
2
3
4
5
6
7
8
9
Agriculture Industries Services Others
March 09 March 10 March 11 March 12