Banks and Financial Institutions can be More Flexible in their Dealings

Banks and financial institutions are seeking more flexibility in dealing with commercial and industrial loan accounts, which are seeing pressure due to cash flows and repayment. Lenders take up loan recast proposals through the corporate debt restructuring (CDR) mechanism. At the last meeting of the core group of CDR, earlier this week, bankers said that real estate cases could soon come to the forum as companies were facing problems.

A recent decision by the Reserve Bank of India allowing cases related to the services sector to CDR has opened the doors for many companies to approach banks for restructuring of loans. “There is need for clarity on how to go about restructuring these cases since service sector companies did not come to CDR earlier,” a banker said. In addition, the forum is trying to work out a mechanism that provides flexibility in decision making at all levels.

RBI allowed restructuring of real estate loans withoutdowngrading status to NPA category. Permitted second restructuring for viable units facing temperory cash flow problems Banks have agreed to provide additional working capital of up to 20 per cent of the credit limit for SMEs Also relaxing margins on letters of credit, guarantees based on assessment of needs The core group comprising bank chiefs also undertook a sectoral review. The units in sectors such textiles, steel and metal - ferrous and non ferrous - are seen to be emerging as pressure points and may be referred to CDR this year, bankers present at the meeting said. They added that there may be more work needed to deal with a higher number of cases and sectors such as real estate.

But there are two issues which they intend to take up with the Reserve Bank of India for facilitating restructuring activity, said the chairman of large bank. The CDR ensures timely and transparent mechanism for restructuring the corporate debts of viable entities facing problems. It looks at accounts which are outside the purview of forums like BIFR and DRT and other legal proceedings. In particular, CDR works to preserve viable corporates that are affected by certain internal and external factors and minimise the losses to the creditors. One senior executive heading CDR unit at a public sector bank said RBI has issued revised guidelines on CDR in the third quarter of 2008, which are broad and help to take effective steps. At present CDR units is dealing with just over 200 cases involving exposure of close to Rs 90,000 crore.

After a five-year spell which saw banks clean up their books thanks to buoyant sales and high profits in the corporate sector, lenders are suddenly seeing pressure build up in some of the loans as demand for goods and services has declined in local and overseas markets amid the economic slowdown. Sensing the difficult times, RBI has extended the concessions like second time restructuring for viable units facing cash problems and permission to revamp real estate account without downgrading the client status of the NPA category.