Financial Express, Saturday, December 25, 1999
Banks, FIs to form corporate debt recast body
MUMBAI, DECEMBER 24: Indian banks and financial institutions are joining hands to
set up a corporate debt restructuring body to help Indian Inc tide over the crisis
triggered by the industrial downturn witnessed in the recent past and recover lenders'
Modeled on the Corporate Debt Recast Advisory Committee (CDRAC) of the Bank of
Thailand, the blue-print of the body is being drafted by M.S. Verma, special advisor to
the Reserve Bank of India. Once put in place, the new body will virtually make the
Board for Industrial & Financial Reconstruction (BIFR) redundant as the sick
companies will no longer be required to be referred to the board since their debt can
be recast through "mutual agreement".
Unlike CDRAC, which is part of the Central Bank of Thailand, or the debt recast body
in Korea, part of the president's office, the proposed debt restructuring body will have a
"contractual status", sources closely associated with the process of forming the new
body told The Financial Express.
At the first stage, there will be an inter-institutional agreement whereby any debt recast
proposal acceptable to 60 per cent of the lenders will form the ground rule for any
negotiation. "Once the proposal is finalized, it will be binding on the part of the
borrowers to accept it. However, the borrowers will have the option of appointing an
external consultant to assess the viability of the proposal," sources said. Verma, away
in London, was not available for comment.
"It will be difficult to have a legal status for this kind of body. The lenders-debtors
agreement will be the backbone of the entire exercise," sources said. The institutions
are expected to recast a huge exposure to a greenfield project of one Mumbai-based
corporate body as a test case for this exercise. "Most often we see corporates
declaring themselves sick and knocking at the doors of BIFR to escape the loan
repayments of banks and institutions. The new body will block this path altogether.
This will also help banks and institutions to tackle their bloating non-performing
assets," said a senior official of a term-lending institution.
The "failure" of the debt recovery tribunals in speedy recovery of cases and a "slack"
legal system have prompted banks and institutions to plan setting up the body. "We
cannot wait for the formation of asset reconstruction fund (ARF) to take care of bulging
NPAs. Something needs to be done on a war-footing and the debt recast body can be
the right solution," said another banker.
There have been instances of banks and institutions converting part of debt into equity
or even picking up stakes in projects to help promoters complete the projects.
However, this is the first instance of a large-scale corporate restructuring from a
common platform. Industrial Development Bank of India chairman GP Gupta, who
heads the coordinating committee of banks and institutions, is likely to head the new