Stressed banks may not pass on benefit to companies under CDR

KOLKATA: Companies under corporate debt restructuring, or CDR, may not get the benefit of lower base rates as banks, already under severe pain, are unlikely to sacrifice more. Theoretically, a base rate reduction means a change in all floating rates, but companies under CDR are governed by their agreements with the lenders. “In CDR, lenders make a sacrifice to help a company’s revival.

We have already taken a lot of pain and banks would not sacrifice more for this set of borrowers,” said United Bank of India executive director Deepak Narang. Many corporate borrowers under stress sought to restructure their debt for easier terms like longer repayment period and softer interest rates. Many a time, the lenders sacrifice a part of the loan while restructuring.

“In practice, whether companies under CDR would benefit from lower rates will entirely depend upon the existing agreement between the borrower and the lenders and how much haircut banks would like to pass on to stressed borrowers,” said Robin Roy, associate director of PwC. Bank of Maharashtra executive director RK Gupta said banks sometimes put a clause in the agreement, which states that even if the base rate is cut, it cannot go lower than other banks’ (who are lenders to the particular company) base rate.

“It will only benefit companies under CDR if their agreement is linked to respective base rates of the lenders,” he said. At present, banks consider restructured loans as standard and set aside 5% of the loan value to cover default risk. Reserve Bank of India has told lenders to treat restructured loans as non-performing assets (NPAs) from April and they would need to make a 15% provision to cover the risk.

About 638 cases involvingRs4,46,156 crore of loans were referred to the CDR cell up to September 2014, while there were 286 live cases involvingRs2,62,360 crore. Banks’ outstanding loan exposure wasRs58,69,000 crore as on October 31, 2014, while they were saddled with Rs2.69 trillion of NPAs as of September 30, 2014.