ASSIGNMENT ON Non Performing Assets Management TOPIC:CDR (Corporate Debt Restructuring) Mechanism and NPA (Non-Performing Assets)

Submitted To: Prof. B. B. Senapati Submitted By:

(1) Govind (2) Nidhi (3) Niraj

Ballav Sahoo---------------16

Kumari------------------------26 Deoria--------------------------28 Kumari----------------------36 Behera----------------------42 Kumar Rout---------------54

(4) Rupam

(5) Santosh (6) Sudipta

Dat e of Submission: 16/01/10

(7) Sunil

Singh Laguri-------------------56

CORPORATE DEBT RESTRUCTURING (CDR) MECHANISM

What Does Corporate Debt Restructuring Mean?

with outstanding debt obligations to alter the terms of debt agreement or to take advantages of lower interest rate.
A method used by companies

The reorganization of a company's outstanding obligations, often achieved by reducing the burden of the debts on the company by decreasing the rates paid and increasing the time the company has to pay the obligation back. This allows a company to increase its ability to meet the obligations. Also, some of the debt may be forgiven by creditors in exchange for an equity position in the company. The need for a corporate debt restructuring often arises when a company is going through financial hardship and is having difficulty in meeting its obligations. If the troubles are enough to pose a high risk of the company going bankrupt, it can negotiate with its creditors to reduce these burdens and increase its chances of avoiding bankruptcy. Method of CDR
The existing debt is called and then replaced with new debt at a lower interest rate. Companies can also restructure their debt by altering the terms and provisions of the

existing debt issue. Corporate Debt Restructuring (CDR) System Background Inspite of their best efforts and intentions, sometimes corporate find themselves in financial difficulty because of factors beyond their control and also due to certain internal reasons. For the revival of the corporate as well as for the safety of the money lent by the banks and FIs, timely support through restructuring in genuine cases is called for. However, delay in agreement amongst different lending institutions often comes in the way of such endeavors. Based on the experience in other countries like the U.K., Thailand, Korea, etc. of putting in place institutional mechanism for restructuring of corporate debt and need for a similar mechanism in India, a Corporate Debt Restructuring System has been evolved. Objective

To support continuing economic recovery. Enabling viable debtors to continue business operations. Promoting fair and equitable debt repayment to creditors. Revival of viable Corporate (genuine cases). Ensuring safety of money lent by Banks & FIs.

The basic objective of corporate debt restructuring should be revival of units by increasing their

production within a time-frame and, if necessary, by changing the management with government support. The CDR mechanism has not proved effective in redressing loan delinquency by big borrowers; it has, in fact, enhanced the losses. The objective of the Corporate Debt Restructuring (CDR) framework is to ensure timely and transparent mechanism for restructuring of the corporate debts of viable entities facing problems, outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned. In particular, the framework will aim at preserving viable corporates that are affected by certain internal and external factors and minimize the losses to the creditors and other stakeholders through an orderly and coordinated restructuring programme. Proposals under CDR entail mainly the following: Extending the repayment period of loans; Converting the un-serviced portion of interest into term loans; and Reducing the rate of interest on outstanding advances.

3. Structure CDR system in the country will have a three tier structure :

CDR Standing Forum CDR Empowered Group CDR Cell

3.1 CDR Standing Forum : 3.1.1 The CDR Standing Forum would be the representative general body of all financial institutions and banks participating in CDR system. All financial institutions and banks should participate in the system in their own interest. CDR Standing Forum will be a self empowered body, which will lay down policies and guidelines, guide and monitor the progress of corporate debt restructuring. 3.1.2 The Forum will also provide an official platform for both the creditors and borrowers (by consultation) to amicably and collectively evolve policies and guidelines for working out debt restructuring plans in the interests of all concerned. 3.1.3 The CDR Standing Forum shall comprise Chairman& Managing Director, Industrial Development Bank of India; Managing Director, Industrial Credit & Investment Corporation of India Limited; Chairman, State Bank of India; Chairman, Indian Banks Association and Executive Director, Reserve Bank of India as well as Chairmen and Managing Directors of all banks and financial institutions participating as permanent members in the system. The Forum will elect its Chairman for a period of one year and the principle of rotation will be followed in the subsequent years. However, the Forum may decide to have a Working

Chairman as a whole-time officer to guide and carry out the decisions of the CDR Standing Forum. 3.1.4 A CDR Core Group will be carved out of the CDR Standing Forum to assist the Standing Forum in convening the meetings and taking decisions relating to policy, on behalf of the Standing Forum. The Core Group will consist of Chief Executives of IDBI, ICICI, SBI, Bank of Baroda, Bank of India, Punjab National Bank, Indian Banks Association and a representative of Reserve Bank of India. 3.1.5 The CDR Standing Forum shall meet at least once every six months and would review and monitor the progress of corporate debt restructuring system. The Forum would also lay down the policies and guidelines to be followed by the CDR Empowered Group and CDR Cell for debt restructuring and would ensure their smooth functioning and adherence to the prescribed time schedules for debt restructuring. It can also review any individual decisions of the CDR Empowered Group and CDR Cell. 3.1.6 The CDR Standing Forum, the CDR Empowered Group and CDR Cell (described in following paragraphs) shall be housed in IDBI. The administrative and other costs shall be shared by all financial institutions and banks. The sharing pattern shall be as determined by the Standing Forum. 3.2 CDR Empowered Group and CDR Cell The individual cases of corporate debt restructuring shall be decided by the CDR Empowered Group, consisting of ED level representatives of IDBI, ICICI Limited and SBI as standing members, in addition to ED level representatives of financial institutions and banks who have an exposure to the concerned company. In order to make the CDR Empowered Group effective and broad based and operate efficiently and smoothly, it would have to be ensured that each financial institution and bank, as participants of the CDR system, nominates a panel of two or three EDs, one of whom will participate in a specific meeting of the Empowered Group dealing with individual restructuring cases. Where, however, a bank / financial institution has only one Executive Director, the panel may consist of senior officials, duly authorized by its Board. The level of representation of banks/ financial institutions on the CDR Empowered Group should be at a sufficiently senior level to ensure that concerned bank / FI abides by the necessary commitments including sacrifices, made towards debt restructuring. 3.2.2 The Empowered Group will consider the preliminary report of all cases of requests of restructuring, submitted to it by the CDR Cell. After the Empowered Group decides that restructuring of the company is prima-facie feasible and the enterprise is potentially viable in terms of the policies and guidelines evolved by Standing Forum, the detailed restructuring package will be worked out by the CDR Cell in conjunction with the Lead Institution. 3.2.3 The CDR Empowered Group would be mandated to look into each case of debt restructuring, examine the viability and rehabilitation potential of the Company and approve the restructuring package within a specified time frame of 90 days, or at best 180 days of reference to the Empowered Group. 3.2.4 There should be a general authorisation by the respective Boards of the participating institutions / banks in favour of their representatives on the CDR Empowered Group,

authorising them to take decisions on behalf of their organization, regarding restructuring of debts of individual corporates. 3.2.5 The decisions of the CDR Empowered Group shall be final and action-reference point. If restructuring of debt is found viable and feasible and accepted by the Empowered Group, the company would be put on the restructuring mode. If, however, restructuring is not found viable, the creditors would then be free to take necessary steps for immediate recovery of dues and / or liquidation or winding up of the company, collectively or individually. 3.3 CDR Cell 3.3.1 The CDR Standing Forum and the CDR Empowered Group will be assisted by a CDR Cell in all their functions. The CDR Cell will make the initial scrutiny of the proposals received from borrowers / lenders, by calling for proposed rehabilitation plan and other information and put up the matter before the CDR Empowered Group, within one month to decide whether rehabilitation is prima facie feasible, if so, the CDR Cell will proceed to prepare detailed Rehabilitation Plan with the help of lenders and if necessary, experts to be engaged from outside. If not found prima facie feasible, the lenders may start action for recovery of their dues. 3.3.2 To begin with, CDR Cell will be constituted in IDBI, Mumbai and adequate members of staff for the Cell will be deputed from banks and financial institutions. The CDR Cell may also take outside professional help. The initial cost in operating the CDR mechanism including CDR Cell will be met by IDBI initially for one year and then from contribution from the financial institutions and banks in the Core Group at the rate of Rs.50 lakh each and contribution from other institutions and banks at the rate of Rs.5 lakh each. 3.3.3 All references for corporate debt restructuring by lenders or borrowers will be made to the CDR Cell. It shall be the responsibility of the lead institution / major stakeholder to the corporate, to work out a preliminary restructuring plan in consultation with other stakeholders and submit to the CDR Cell within one month. The CDR Cell will prepare the restructuring plan in terms of the general policies and guidelines approved by the CDR Standing Forum and place for the consideration of the Empowered Group within 30 days for decision. The Empowered Group can approve or suggest modifications, so, however, that a final decision must be taken within a total period of 90 days. However, for sufficient reasons the period can be extended maximum upto 180 days from the date of reference to the CDR Cell. 4. Other features: 4.1 CDR will be a Non-statutory mechanism 4.1.1 CDR mechanism will be a voluntary system based on debtor-creditor agreement and inter-creditor agreement. 4.1.2 The scheme will not apply to accounts involving only one financial institution or one bank. The CDR mechanism will cover only multiple banking accounts / syndication / consortium accounts with outstanding exposure of Rs.20 crore and above by banks and institutions.

4.1.3 The CDR system will be applicable only to standard and sub-standard accounts. There would be no requirement of the account / company being sick, NPA or being in default for a specified period before reference to the CDR Group. However, potentially viable cases of NPAs will get priority. This approach would provide the necessary flexibility and facilitate timely intervention for debt restructuring. Prescribing any milestone(s) may not be necessary, since the debt restructuring exercise is being triggered by banks and financial institutions or with their consent. In no case, the requests of any corporate indulging in wilful default or misfeasance will be considered for restructuring under CDR. 4.1.4 Reference to Corporate Debt Restructuring System could be triggered by (i) any or more of the secured creditor who have minimum 20% share in either working capital or term finance, or (ii) by the concerned corporate, if supported by a bank or financial institution having stake as in (i) above. 4.2 Legal Basis The legal basis to the CDR mechanism shall be provided by the Debtor-Creditor Agreement (DCA) and the Inter-Creditor Agreement. The debtors shall have to accede to the DCA, either at the time of original loan documentation (for future cases) or at the time of reference to Corporate Debt Restructuring Cell. Similarly, all participants in the CDR mechanism through their membership of the Standing Forum shall have to enter into a legally binding agreement, with necessary enforcement and penal clauses, to operate the System through laid-down policies and guidelines. 4.3 Stand-Still Clause 4.3.1 One of the most important elements of Debtor-Creditor Agreement would be 'stand still' agreement binding for 90 days, or 180 days by both sides. Under this clause, both the debtor and creditor(s) shall agree to a legally binding 'stand-still' whereby both the parties commit themselves not to taking recourse to any other legal action during the 'stand-still' period, this would be necessary for enabling the CDR System to undertake the necessary debt restructuring exercise without any outside intervention judicial or otherwise. 4.3.2 The Inter-Creditors Agreement would be a legally binding agreement amongst the secured creditors, with necessary enforcement and penal clauses, wherein the creditors would commit themselves to abide by the various elements of CDR system. Further , the creditors shall agree that if 75% of secured creditors by value, agree to a debt restructuring package, the same would be binding on the remaining secured creditors. 5. Accounting treatment for restructured accounts The accounting treatment of accounts restructured under CDR would be governed by the prudential norms indicated in circular DBOD. BP. BC. 98 / 21.04.048 / 2000-01 dated March 30, 2001. Restructuring of corporate debts under CDR could take place in the following stages: a. before commencement of commercial production; b. after commencement of commercial production but before the asset has been classified as sub-standard;

c. after commencement of commercial production and the asset has been classified as sub-standard. 6. The prudential treatment of the accounts, subjected to restructuring under CDR, would be governed by the following norms: 6.1 Treatment of standard accounts restructured under CDR: a. A rescheduling of the instalments of principal alone, at any of the aforesaid first two stages [paragraph 5(a) and (b) above] would not cause a standard asset to be classified in the sub-standard category, provided the loan / credit facility is fully secured. b. A rescheduling of interest element at any of the foregoing first two stages would not cause an asset to be downgraded to sub-standard category subject to the condition that the amount of sacrifice, if any, in the element of interest, measured in present value terms, is either written off or provision is made to the extent of the sacrifice involved. For the purpose, the future interest due as per the original loan agreement in respect of an account should be discounted to the present value at a rate appropriate to the risk category of the borrower (i.e. current PLR + the appropriate credit risk premium for the borrower-category) and compared with the present value of the dues expected to be received under the restructuring package, discounted on the same basis. c. In case there is a sacrifice involved in the amount of interest in present value terms, as at (b) above, the amount of sacrifice should either be written off or provision made to the extent of the sacrifice involved. 6.2 Treatment of sub-standard accounts restructured under CDR: a. A rescheduling of the instalments of principal alone, would render a sub-standard asset eligible to be continued in the sub-standard category for the specified period, provided the loan / credit facility is fully secured. b. A rescheduling of interest element would render a sub-standard asset eligible to be continued to be classified in sub-standard category for the specified period subject to the condition that the amount of sacrifice, if any, in the element of interest, measured in present value terms, is either written off or provision is made to the extent of the sacrifice involved. For the purpose, the future interest due as per the original loan agreement in respect of an account should be discounted to the present value at a rate appropriate to the risk category of the borrower (i.e., current PLR + the appropriate credit risk premium for the borrower-category) and compared with the present value of the dues expected to be received under the restructuring package, discounted on the same basis. c. In case there is a sacrifice involved in the amount of interest in present value terms, as at (b) above, the amount of sacrifice should either be written off or provision made to the extent of the sacrifice involved. Even in cases where the sacrifice is by way of write off of the past interest dues, the asset should continue to be treated as substandard. The sub-standard accounts at 6.2 (a), (b) and (c) above, which have been subjected to restructuring, etc. whether in respect of principal instalment or interest amount, by whatever modality, would be eligible to be upgraded to the standard category only after the specified period, i.e., a period of one year after the date when first payment of interest or of principal, whichever is earlier, falls due, subject to satisfactory performance during the period. The

amount of provision made earlier, net of the amount provided for the sacrifice in the interest amount in present value terms as aforesaid, could also be reversed after the one-year period. 6.3 During this one-year period, the sub-standard asset will not deteriorate in its classification if satisfactory performance of the account is demonstrated during the period. In case, however, the satisfactory performance during the one year period is not evidenced, the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule. 6.4 The asset classification under CDR would continue to be bank-specific based on record of recovery of each bank, as per the existing prudential norms applicable to banks. 7. Disclosure Banks should also disclose in their published Annual Accounts, under the "Notes on Accounts", the following information in respect of CDR undertaken during the year :

Total amount of loan assets subjected to restructuring under CDR. The amount of standard assets subjected to CDR. The amount of sub-standard assets subjected to CDR.

Process of CDR A number of companies are now taking a good look at business debt restructuring to resolve their unmet financial obligations. This is often a preferable solution to bankruptcy probably because it is less expensive and more discreet. But just like bankruptcy, company debt restructuring involves a systematic process.
The consultation process Because business debt restructuring is nothing but an

aggregate loan agreement, the lender seeks a series of consultation sessions with the borrower. During these meetings, the lender assesses the company's overall financial situation. It is at this point that all the company's financial obligations are evaluated against the expected regular cash flow. Primarily because of this, small business debt restructuring works differently than that of a big corporate account.
The negotiation process. Once the assessment procedure is finished, the lender

then settles an agreement with all the borrower's creditors and vendors. The main idea is to arrive at a solution that is acceptable to all the parties involved. When that is achieved, the lender can proceed to implement the solution agreed upon.
The liquidation of assets. The liquidation of the business's assets, if found to be

necessary by all parties concerned, is the next step in the process. In some cases, restructuring your existing debt may require you to pay a large amount of money up front. If your lender can't cover that, you have no other choice but to liquidate some assets. But most of the time, the liquidation strategy is only used to get the profitability of the business back.
The restructuring process starts. This is the step where the contract is signed

and the agreement is enforced. The borrower, and in this case the business, agree to the aggregate loan amount and to other details including the monthly payment

obligation, the interest rate, and the term of payment. After everything is accounted for, the business is now officially under a debt-restructuring program is expected to make payments as stipulated. This is the last level of debt help available to the business before a filing for bankruptcy. These are the steps involved in a business debt restructuring procedure. Simple as it may seem, businesses should not leap into the plan immediately without careful consideration. Company debt restructuring is a process that has to be critically evaluation to ensure the ultimate fate of the business involved ADVANTAGES The primary advantages of debt restructuring involve matters of control and overall creditworthiness. Allows a business to gain control of its finances. With business debt restructuring, debts carrying a high interest rate can be transferred to another lender with a lower rate and potentially a prolonged payment term so that the monthly obligation is reduced. Improves credit score. Businesses have credit scores too. If restructuring is performed properly, it can actually improve those scores after a period of time. Restructuring your existing debt ensures easier debt payments. When debts are paid regularly and on time, good credit scores result. Engages the help of third party. With intervention of third party financial institutions, thereby processing large enterprise or small business debt restructuring, everything flows more smoothly and the business owner is relieved of much of the stress of debt management. DISADVANTAGES The primary drawbacks to debt restructuring involve the availability of new lines of credit and overall business image. Places a hold on new credit applications. While business debt restructuring is underway, the first reaction of the creditors is to hold all applications for new credit to ensure that the borrower pays the existing obligations regularly after the whole restructuring process is enforced. It won't look good to the public. If the corporate house chooses to restructure its debts and the information leaks out to customers, they may assume that the corporate houses are having problems with their finances or that they are close to bankruptcy. The customers could start looking for a more stable company to deal with.

NONPERFORMING ASSET Now-a-days banks are not only for profit but also for social responsibility with little commerciality. In liberalizing economy banking and financial sector get high priority. Indian banking sector of having a serious problem due non performing. The financial reforms have helped largely to clean NPA was around Rs. 52,000 crores in the year 2004. The earning capacity and profitability of the bank are highly affected due to this
An asset becomes NPA when it ceases to generate income for the bank. This would mean that interest, which is debited to borrowers account, has to be realised by the bank. An account has to be classified as NPA on the basis of record of recovery rather than security charged in favour of the bank in respect of such account. Thus, an account of a borrower may become NPA if interest charged to that particular borrower is not realised despite the account being fully secured. Identification Of Account As NPA A non-performing asset (NPA) is a loan or an advance where; interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan the account remains out of order in respect of an Overdraft/Cash Credit (OD/CC) the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted a loan granted for short duration crops will be treated as NPA, if the installment of principal or interest thereon remains overdue for two crop seasons. a loan granted for long duration crops will be treated as NPA, if the installment of principal or interest thereon remains overdue for one crop season. In case of any other credit facility, if the amount to be received remains overdue for more than 90 days, then the account will be classified as NPA. Out of order the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power,but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period. Over due Any amount due to the bank under any credit facility is overdue if it is not paid on the due date fixed by the bank. Exceptions Banks own TDRs (Term Deposit Receipts) Loan against NSC (National Saving Certificate)

 LIC policies & Surrender Value: if before the maturity of LI policy the surrender value is less than actual amount. Indira vikas patras, kisan vikas patras provided adequate margin available. In respect of agricultural advances as well as advances for other purposes granted by banks to ceded PACS (Primary agricultural credit society)/ FSS (Farmers Service Society) under the on-lending system, only that particular credit facility granted to PACS/FSS which is in default will be classified as NPA and not all the credit facilities sanctioned to a PACS/FSS. The other direct loans & advances, if any, granted by the bank to the member borrower of a PACS/ FSS outside the on-lending arrangement will become NPA even if one of the credit facilities granted to the same borrower becomes NPA. The credit facilities backed by guarantee of the Central Government though overdue may be treated as NPA only when the Government repudiates its guarantee when invoked.

Prudential norms Income recognition Income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts Fees and commissions earned by the banks as a result of re-negotiations or rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit. Any subsequent recovery in NPA a/c should first be appropriate towards interest arrears & balance, if any, to principal. Asset classification Standard Asset The account is not non-performing. Sub-Standard Asset A sub standard Asset is one which has remained NPA for a period less than or equal 12 months. Doubtful Asset NPA period exceeding 12 months but after doubtful of 1 year. Three Categories Category Doubtful - I Doubtful - II Doubtful - III above 4 years) Loss Assets These are accounts, identified by the bank or internal or external auditors or by RBI Inspectors as wholly irrecoverable but the amount for which has not been written off. Period up to One Year (NPA is 1 3 Years (NPA is 2 4 year) above 3 Years (NPA is

2 year)

 When value of security is below 10% of the loan outstanding, it is treated as loss assets. The classification of assets of scheduled commercial bank. (Amount Rs. crores) Asset Standard assets Sub standard assets Doubtful assets Loss assets 2001 494716 18206 37756 8001 2002 609972 21382 41201 8370 2003 709260 20078 39731 8971 2004 837130 21026 36247 7625

Provisioning Standard asset The banks should make a general provision of a minimum of 0.25 percent on standard assets on global loan portfolio basis

All scheduled commercial banks are required to increase the general provision on standard advances from 0.25 percent to 0.40 percent except for direct advances to agricultural and SME sectors (as per circular issued by RBI on 8th of Nov 2005) Sub-standard asset 20% of outstanding balance after deducting interest debited and not collected during the year for secured as well as unsecured advances. Doubtful assets
Period value DICGC/ECGC cover Upto 1 year 1to 3 years More than 3 years of tangible security + unsecured portion of advance after 20% 30% 100% + + + 100% 100% 100%

Loss Assets Loss assets should be written off. If loss assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for provision.

Capital Adequacy Ratio (CAR) Capital adequacy ratio is the ratio which determines the capacity of a bank in terms of meeting the time liabilities and other risk such as credit risk, market risk, operational risk, and others. It is a measure of how much capital is used to support the banks' risk assets.
All bank must kept the minimum standard set by the Bank for International Settlements (BIS) is 8% (comprising 4% each of Tier 1 and Tier 2 capital).

Tier one capital is the capital in the bank's balance sheet that can absorb losses without a bank being required to cease trading. Tier two capital can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors. Exposure Norms An exposure norm indicates the financing limit of the banks, which is depending upon capital having by banks. As per Exposure Norms, banks mustnt give more than: 15% of paid-up capital to individual, 50% to group and 60% for infrastructure.