The Indian Banking scenario is going through unprecedented times with stressed loan portfolio. The portfolio of all Banks put together is more than 7 lakh crore which is > 10% of total advances and there is an apprehension that there could be significant additions too. Realizing the problem RBI has come out with many changes and schemes to tackle such stressed accounts. Here are come of the distress resolution solutions that you can look into.

1. Corporate India – Distress
Resolution Solutions
Including Restructuring
May 2016

2. Background

3. • As its commonly known Indian Banking scenario is going through
unprecedented times with stressed loan portfolio touching all time
high.
• As per Public Data available Distressed Loan portfolio of all Banks
put together is more than 7 lakh crore which is > 10% % of total
advances
• There is an apprehension that there could be significant additions as
many stressed loan accounts have been disguised as standard.
• Realizing the problem RBI has come out with many changes and
schemes to tackle such stressed accounts
• Most significant of which is withdrawal of assets classification
benefit upon restructuring. Prior to 1st April 2015 Banks were
allowed to restructure a Loan and retain standard assets class subject
to certain conditions.

4. Debt Restructuring

5.  RBI definition of a Restructured account.
“A restructured account is one where the bank, for
economic or legal reasons relating to the borrower's
financial difficulty, grants to the borrower concessions that
the bank would not otherwise consider. Restructuring
would normally involve modification of terms of the
advances / securities, which would generally include,
among others, alteration of repayment period / repayable
amount/ the amount of instalments / rate of interest (due
to reasons other than competitive reasons).
 Restructuring can happen before COD or post COD

6.  Due to delay in implementation
› Change in repayment period due to change in COD is not counted as
restructuring if change in COD is upto 2 years for infrastructure
projects and upto 1 year for other projects
› Further extension by 1 years is allowed without account being
considered as NPA. However account is to be treated as restructured.
Application for extension should come before end of original COD.
› One more year of extension is allowed if delay is due to arbitration
proceedings or a Court case
 Due to cost overrun : Change in repayment schedule due to over run
not to be treated as restructured if
 Increase is on account of change in scope and size
 Increase is more than 25% excluding cost over run
 Bank does fresh viability study
 Rating is not downgraded by more than 1 notch

7.  Weak management
 Promoters integrity : Siphoning of funds
 Increase in Interest cost due to increase in interest burden
 Over optimistic projections
 Over leveraged positions
 Debt trap : Fresh debt to meet debt servicing
 Banks not extending required support in time
 Promoters inability to bring Equity
 Erosion of working Capital funds due to losses and repayments
burdens
 Dressing up of Balance sheet by hiding losses and inflating current
assets
 Non availability of raw materials labour etc.

8.  Change in exchange rate and unhedged position
 Delay in receipt of government approvals
 Change in Industry fortunes. Some examples
› Cut in Govt spending : Infra
› Incentives by Govt to new Industries : Textile incentive scheme by
Rajasthan Gujarat MP Maharashtra etc
› Global competition : Steel
› Govt inability to take reforms : Power
› Excess supply : Sugar
› Global slowdown : Ready made garments
› Upgradation or invention of new Technology

9. Restructuring
One Time Settlement
Reference to BIFR
Deferring the
Decision
Stake Sale
Assets Sale
Assets debt swap
Restructuring
One Time Settlement
Sale/Assignment to
ARC
Recovery through
DRT
Enforcement through
SARFAESI
Assets debt swap
Borrower Lender

10. CDR Bilateral
SDR5/25 Scheme
JLF
Change of Management Through ARC
Options for
restructuring

11. Corporate Debt
Restructuring (CDR)

12.  The scheme of CDR was put in place
by RBI In August 2001 to devise a
system where restructuring of large
corporate exposure from multiple
banks could be carried out.
 The scheme was framed based on the
mechanism prevalent in countries like
the U.K., Thailand, Korea, Malaysia etc.
 It has a 3 tier structure -
 CDR Cell –initial scrutiny of proposals
 Empowered Group (EG)-decides
whether to take up the restructuring or
not and approves restructuring plan by
CDR Cell
 Standing Forum-lays down policies &
guidelines to be followed by CDR Cell
&EG
 To ensure timely &
transparent mechanism for
restructuring debts of viable
corporate entities facing
problems for the benefit of
all concerned.
 To aim at preserving viable
corporates that are affected
by certain internal and
external factors
 To minimize the losses to
creditors and other
stakeholders through an
orderly and coordinated
restructuring programme.

13.  Loan assets with an aggregate debt outstanding (inclusive of non fund
limits) of Rs 10 crore and above and involving at least two lenders.
 The case may be referred by a lender with exposure of minimum 20% by
value. A corporate can also refer its case with letter of support from a
lender or lenders with exposure of 20% by value.
 Reference of any account / case to CDR Cell is asset classification neutral.
Asset of any class can be admitted subject to certain specific stipulations.
 Other stipulations regarding minimum margin from the Promoters,
Personal Guarantee of Promoters, Pledge of promoters holding etc have to
be observed.
 Cases of fraud and misfeasance are ineligible.
 Cases of willful default may be considered if permitted by Core Group
depending on case specifics.
 BIFR cases are eligible subject to approval of Core Group and with certain
additional conditions.

14.  Promoter’s contribution minimum 25% of sacrifices or 2% of debt
restructured, whichever is higher.
 80% to be brought in upfront and balance 20% within 1 year
 Personal guarantee of the Promoter Directors
 Pledge of promoter’s shareholding
 Pooling of securities. Specific Securities provided to any lender to be
excluded
 Right of equity conversion in case of default
 Right to accelerate the repayment schedule if the cash flows permit
 Right of recompense – has to be calculated at the time of admission and to
be disclosed in audited financials
 Decision of 75% in value and 60% in numbers binding on all
 Events of default : Default in payment/violation of undertakings/Fail to
renew insurance policies/withholding or providing misleading
information/capex without approval/withdrawal of unsecured
loan/diversion of funds/sale of assets without approval etc.

15. Particulars CDR BILATERAL
No of lenders Minimum 2 No restriction
Quantum of Loan Minimum 10 crore No restriction
Super Majority Clause Yes No
Assets classification
benefit*
Yes if implemented
within 120 days from the
date of filing of Flash
Report
Yes if implemented
within 120 days from the
date of application by
the borrower
Stand Still Clause Exists Doesn’t exist
Promoters contribution Higher of 25% of
sacrifice or 2% of debt
Higher of 20% of
sacrifice or 2% of debt
*Regulatory forbearance regarding asset classification benefit has been
withdrawn for all restructurings effective from 1 April, 2015.

16. Joint Lenders’ Fund
(JLF)

17.  Before NPA, banks are required to identify incipient stress
under following categories of Special Mention Account (SMA) :
 RBI came out with a circular in Feb 2014 about compulsory
formation of Joint Lenders Forum (JLF) mechanism in SMA – 2
Account with the aim to ensure that banking system recognise
financial distress early, takes prompt steps to resolve it, and
ensures fair recovery for lenders and investors
Category Basis for classification
SMA-0 Overdues less than 30 days but signs of incipient stress
SMA-1 Principal or interest payment overdue between 31-60 days
SMA-2 Principal or interest payment overdue between 61-90 days

18.  RBI has formed a Central Repository of Information on Large
Credits (CRILC)
 Banks are required to report Credit information of all accounts
including classification of account as SMA to CRILC for exposure ≥
Rs. 5 crore
 Upon report by any lenders to CRILC as SMA-2, banks should
mandatorily form JLF if aggregate exposure (AE) ≥ Rs 100 crore.
 Lenders have option of forming a JLF even when AE in an account
is < Rs 100 crs and/or when the account is reported as SMA-0 or
SMA-1
 A borrower may request the lender/s, with substantiated grounds,
for formation of a JLF on account of imminent stress.

19.  JLF has to consider and decide one of the following Corrective Action Plan
(CAP) to resolve the stress in the account.
Rectification
Restructuring
Recovery
Corrective
Action
Plan

20. Consider the possibility of restructuring the account if it is prima facie viable
and the borrower is not a willful defaulter.
•Obtain commitment from the borrower supported with identifiable cash flows.
•Possibility of getting equity/Strategic investors may be explored.
• Intention is to achieve turnaround without any change in Loan Terms.
•JLF may also consider providing need based additional finance.
• Additional financing should not be provided with a view for ever- greening the
account.
A: Rectification
B: Restructuring
C: Recovery
Once the first two options at (A) and (B) are seen as not feasible, due
recovery process may be resorted to. JLF to decide best recovery process.

21. • JLF is required to arrive at an agreement on the option to be
adopted for CAP within 45 days from (i) the date of an account
being reported as SMA-2 by one or more lender, or (ii) receipt
of request from the borrower to form a JLF
• Decisions by a minimum of 75% of creditors by value and 50%
of creditors by numbers in the JLF would be binding on all.
• JLF should sign off the detailed final CAP within the next 30
days from the date of arriving at such an agreement.
• Accounts with AE of Rs. 500 crs and above will have to be
subjected to an evaluation by an Independent Evaluation
Committee (IEC)
• If restructuring is considered as CAP, JLF has the option to go
to CDR or do restructuring outside CDR

22. Step Aggregate Exposure
< 500 crore > 500 crore
Finalization of CAP 45 days 45 days
Detailed Final CAP Next 30 days Next 30 days
TEV Next 30 days Next 30 days
Approval by IEC NA Next 45 days
Approved by JLF and
sanction
Next 15 days Next 15 days

23. Step Aggregate Exposure
< 500 crore > 500 crore
Finalization of CAP 45 days 45 days
TEV Next 30 days Next 30 days
Approval by IEC NA Next 45 days
CDR Cell to CDR EG NA Next 7 days
Decision by CDR EG Next 30 days Next 30
Approval and sanction
by all Lenders
Next 30 days Next 30 days

24. 5:25 Scheme

25.  As per the 5:25 flexible structuring scheme, the lenders are allowed to
fix longer amortization period for loans to projects in the infrastructure
and core industries sector (detail of eligible industries in subsequent
slide), for say 25 years, based on the economic life or concession period
of the project, with periodic refinancing, say every 5 years.
 Repayment is considered as bullet repayment at refinance interval for
the purpose of ALM of the Bank
 DSCR and other ratios to be calculated for entire duration of the loan
 Refinance can be by same lenders or new lenders or combination
 Such refinancing repeated till the end of fresh loan amortization
schedule
 Interest rates to be renegotiated at the time of refinance

26.  Flexible structuring scheme initially allowed for new project has been
extended to existing loans in Infrastructure and Core Industries
 Scheme Eligible for outstanding Term loans > Rs. 500 crore
 Banks may fix a fresh amortization schedule for the existing projects loans,
once during the life time of the project, after the COD. Maximum tenure
25 years with refinance every 5 years
 Such refixation not to be treated as restructuring subject to:
 The loan is standard as on date of change of loan amortization schedule
 NPV of loan to remains same
 Fresh loan amortization schedule should be within 85% of the initial concession
period / life of the project
 A fresh viability study is carried out which is vetted by IEC
 NPA accounts can also be restructured under the scheme. However, they
shall be considered as ‘restructured’ and shall be upgraded after 1 years of
satisfactory performance
 Once an account becomes NPA further refinancing will stop

27. Infrastructure Industries
-Transport: Roads, ports, Inland, waterways,
Airport, Railway track, Urban Public Transport
-Energy: Electricity generation, Transmission,
Distribution, Oil pipelines, Oil/Gas/LNG storage
facility, Gas Pipelines,
-Water & Sanitation Infrastructure
-Communication: Telecommunication towers
cable network and optic fibers
- Social Commercial Infrastructure: Education
institutes, Hospitals, Common infrastructure for
SEZ, post harvest storage facility, Capital
Investment in fertilizers, Cold chain, Hotel,
Convention centres, Soil testing labs
Core Industries
-Coal
-Crude Oil
-Natural Gas
-Petroleum Refinery
Products
-Fertilizers
-Steel (Alloy + Non alloy)
-Cement
-Electricity

28. Strategic Debt Restructuring
Scheme (SDR)

29.  One of the common cause for loan account becoming stressed has
been management inefficiencies.
 Concept of Strategic Debt Restructuring ("SDR") has been
introduced by RBI to help banks recover their loans by taking
ownership and management control in cases where borrower is
unable to achieve viability parameters and/or non adherence to
critical conditions despite restructuring granted by lenders.
 Scheme is applicable only in cases where change in ownership is
likely to improve the economic value of the loan asset and
prospects of recovery of their dues

30.  For fresh cases of restructuring post SDR guidelines (8 June 15) the
restructuring agreement should contain provisions for SDR
 For already restructured cases SDR can be invoked if enabling clauses
are included in the restructuring agreement
 Henceforth all fresh loans to have SDR enabling provisions
 Lenders have to convert their loans to equity so as to have 51% equity
stake in the company within 210 days from reference date (decision to
invoke SDR). Conversion has to be as per fair value (defined later)
 Lenders have to divest minimum 26% equity of the company to new
promoters within 18 months from reference date

31.  Banks get standstill clause benefit for 18 months i.e. till
equity is diluted to new promoters. That means account
status as on reference date shall remain
 Upon transfer of equity to new promoters even NPA account
upgraded to Standard
 Banks can refinance loans to new promoters at mutually
agreed terms. Such refinance not to be treated as
restructuring. However, Banks have to provide for any
diminution in value plus write off
 New Promoters has to be unrelated to existing promoters
 Current management not to be allowed to continue without
Bank representative on Board and without supervision by
Bank appointed agency

32.  Decision making as per JLF. 75% by Value and 50% by numbers
binding on all.
 Conversion under SDR to get exemption from SEBI Capital
Issue and Open offer provisions
 Banks get exemption from MTM provisions on equity so
converted for 18 months. However, as per latest circular bank
has to provide for depreciation over 4 quarters
 Equity so converted shall be exempted from ceilings on Capital
Market exposure. However, Banks have to provide 150% Risk
weight for 18 months
 Exemption from investor – associate relationship even if
individual Bank holds more than 20% of voting power

33.  Lowest of following
› Market value (for listed companies only): Average of closing prices
during last 10 trading days preceding the ‘reference date’.
› Break-up value (Book value) per share to be calculated from the
company’s latest audited balance sheet (without ‘revaluation reserves’)
adjusted for cash flows and financials post the earlier restructuring; the
balance sheet should not be more than a year old. In case the latest
balance sheet is not available this break-up value shall be Rs.1.
 However, since equity cannot be issued at a discount conversion price
cannot be below face value.
 The pricing formula stated above has been exempted from the SEBI (Issue
of Capital and Disclosure Requirements)Regulations,2009
 Exemption from making an open offer under Regulation 3 & Regulation 4
of the provisions of the SEBI(Substantial Acquisition of Shares and
Takeovers) Regulations,2011.

34. Change of Management
(Outside SDR)

35.  RBI came out with another circular on 24th September 2015
allowing Banks to go for change of ownership outside SDR
provided the stress was due to operational/ managerial
inefficiencies.
 Change in ownership can be by way of
› Sale of shares by lenders acquired by invocation of pledge
› Conversion of debt into equity (outside SDR)
› Issue of fresh shares by borrowing entity
› Acquisition of borrowing entity by another entity
 Most of the provisions of SDR holds true such as
› new promoters should be unrelated to existing
› new promoters should have minimum 51% equity (26% if FDI rules
restrictions applies)
› Bank can refinance the existing debt without considering it
restructuring. However, banks have to provide for diminution in fair
value
› Upon change of ownership account can be upgraded to Standard
› However, exemption from SEBI regulations for issue of capital and
open offer not available
› Circular is silent about conversion price

36. NPA Resolution
through ARC

37. BAD
LOAN NPA
Asset Reconstruction
Company (ARC)
Borrower
Bank

38.  Assets Reconstruction Companies are in business of
buying NPA accounts from banks and FI’s.
 ARCs’ are specialized Institutions for resolution of
stressed loans having domain knowledge.
 ARC has the same rights as banks have for the
purpose of recovery of dues.
 ARC broadly has following functions
› Acquisition of financial assets
› Restructure / rescheduling of Debts
› Enforcement of Security Interest
› Settlement of dues payable by the borrower

39.  ARC functions more or less like a Mutual Fund. It transfers the acquired
assets to one or more trusts (set up u/s 7(1) and 7(2) of SRFAESI Act, 2002)
at the price at which the financial assets were acquired from the Lenders
 Then, the trusts issues Security Receipts (SR) to Qualified Institutional
Buyers [as defined u/s 2(u) of SARFAESI Act, 2002]. The trusteeship of
such trusts shall vest with the ARC.
 As per latest rule ARC has to subscribe minimum 15% of SR.
 ARC will get Trust management fee from the trusts and recovery
commission in addition to reimbursement of exps. Incurred for the
purpose of recovery.
 Any upside in between acquired price and realized price will be shared
with the beneficiary of the trusts Lenders and ARC.
 Any downside in between acquired price and realized price will be borne
by the beneficiary of the trusts (Banks/Fis and ARC).
 ARC can acquire a loan on cash basis as well. In such case all
upside/downside belongs to ARC

40.  Banks calls for bids for their bad loans from ARCs
 Such bids can be either for cash or on SR basis
 Such bids can be for individual loan or a pool
 Banks normally seek competitive bidding after fixing up reserve price which is
to be based on Value of underlying securities / worth of guarantors /likely
cash flow forecast etc.
 In many cases borrower enters into an OTS with the Bank and instead of
paying from own sources gets loan account funded from ARC by assignment
of loan to ARC on all cash payment basis. Interest charged in such transaction
would be around 25%p.a.
 Once a loan is acquired by ARC it gets in touch with the borrower seeking
amicable settlement/ payment schedule out of operations/sale of assets/other
cash flow. Even issue of Equity in lieu of debt can be considered.
 In some cases borrower and ARC enter into informal arrangement prior to
bidding
 Borrower thus gets time to settle/pay the loan at a much better terms than
original lender and able to retain economic value.

41. Summary analysis of
all options

42. OPTION FEATURE CONCERN
CDR Has been widely used earlier and helped
many companies in coming out of stress
Majority decision making
Lost charm after withdrawal of forbearance benefit by RBI
Not helped much. Too many failures post CDR implies it
was deferment of inevitable
Bilateral Mostly used for individual cases
Had worked well earlier
Very few cases considered by lenders now post
withdrawal of forbearance benefits.
JLF Majority decision making
Early decision making
Guidelines have come too late. Damage is already done
Timelines are not maintained resulting in slow progress.
As account becomes NPA upon restructuring most lenders
prefer rectification or recovery route
5 by 25 Helps realign debt without restructuring
tag
Available for large cases and a few select industries only
SDR Helps realign debt without restructuring
tag
Weed out inefficient management
For old cases cannot be forced upon
Existing management may continue in disguise. Finding
new promoter is always a challenge.
COM More flexibility than SDR SEBI exemption not available
ARC Help in Realign/settle debt at a realistic
level
Faster decision making as question of
accountability doesn’t arise
Banks are not able to realise significant portion of their
dues
Increase in cost as ARC charge management fee
ARC’s capital base too limited compared to overall
magnitude of stressed assets

43. What Next ?

44.  Parliament is expected to pass new Bankruptcy law soon which is in line with
Chapter XI of US Bankruptcy code
 This law is expected to change dramatically how business failures are handled
in the country
 BIFR is expected to be repealed
 There is a talk about special package for steel industry since all efforts to
realign debt of steel industry (CDR/ 5 by 25 etc) are not saving Bank loans
from NPA
 RBI wants clean up of Bank book by March 2017. RBI is very clear that Banks
need to recognise problem and not pretend.
 GOI has committed to provide need based capital to Banks. Tendency to hide
NPA expected to get tapered off
 Likely consolidation of Banks expected to improve decision making

45.  Applicability: All kinds of corporate enterprises,
limited liability partnerships, partnership firms and
individuals
 Scope: Insolvency, liquidation, voluntary
liquidation (solvent insolvency) and bankruptcy
 Key Objectives:
 Preserve value by providing linear, time-bound
and collective process
 Improve time taken to resolve failure and
provide clear exit options to investors
 Increase recovery value
 Develop other avenues of financing businesses
(such as bond markets, venture capitals ) other
than banks
 Tribunal :National Company Law Tribunal (NCLT)
is the proposed forum for corporate bankruptcy
and DRT is for individual bankruptcy
Default
Appointment of an
Insolvency professional
Calm period/moratorium
period (180/270 days)
75% of creditors to approve
Yes No
Implement
the plan
Goes into
liquidation
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