The Rot Called Corporate Debt Re-structuring
Moneylife Digital Team 30 October 2014

The government has sanctioned fresh capital for public sector banks. Will this capital too leak out into bad loans and be dumped into the opaque and another corrupt process called CDR?


The government of India has just announced a fresh round of capital infusion to keep unaccountable and corrupt Public Sector Banks (PSBs) alive. The money will come from taxpayers' pockets, as has happened in the past.


Exactly as in the past, no accountability has been imposed on the banks in return for the capital infusion. The Ministry of Finance and Reserve Bank of India (RBI) never pause to think that well-run private sector banks working within the same economic system do not need capital the way PSBs do. Why do the PSBs need all this money at regular intervals? Where is all this capital going?


PSBs need regular infusion of capital because they lose tens of thousands of crores in bad loans, for which PSBs are not even held accountable. Indeed, a lot of the bad loans land up in another corrupt and opaque mechanism called Corporate Debt Restructuring (CDR), run under the auspices of the so-called banking regulator, RBI. There is no tracking of what happens to restructured loans. This absolves the banks from any accountability.


If the Finance Ministry is interested in tracing where the capital is leaking out to and or in estimating the extent of rot in PSBs, it should investigate CDRs on priority. It will discover that CDR allows for artificially favourable asset classifications in the accounts admitted under CDR, which are otherwise bad loans.


This misreporting through falsely favourable artificial asset classification, without making the CDR cell accountable, has encouraged banks to push their massive bad loans into CDR. This has severely compromised the basic reason for which the CDR cell was established.


How widespread is the menace? A typical public sector bank has around 35% of its advances to large and mid-size corporates. Surprisingly, a large portion of this part of the credit book is being referred to CDR, which involves loans where for a two-year period there has been no income, then fresh loans are granted at a concessional pricing at 11%-12% p.a.


This portfolio gives returns, which are far lower than the risk-adjusted cost of capital of most banks. How much are banks giving up on their income under this dubious RBI-managed restructuring process? Unfortunately, bank-wise restructured portfolio data is not available in the public domain.


But those who have been involved with CDR say that “about 60% of loans to large and mid-sized corporates have been/are being restructured either bilaterally or under the CDR scheme. Thus, around 21% (60% of 35% of total loan book) of an otherwise high returns loan book is giving returns which reduces the value of business, i.e. gives a return which is lower than the cost of capital.”


Remember, agricultural loans contribute 18% of the loan book and are also lent at concessional rates, hence earn returns that are lower than the cost of capital. Therefore, adding the restructured loans (21%) and agricultural loans (18%), nearly 38% of the total loan book provides lower returns than the cost of capital.


While agricultural loans are a part of priority sector obligation, their proportion of the restructured loan book is ever increasing and at times even difficult to predict, as banks rush to use CDR as a means for hiding and kicking bad loans down the road.


Unfortunately, unless someone from the Modi government steps in and starts asking tough questions, this burgeoning restructured portfolio is likely to come in the way of sensible banking and monetary policy.


Interestingly, senior RBI officials have often mentioned that banks are indulging in evergreening of loans, (according to former Deputy Governor Dr KC Chakrabarty) as well as “putting lipstick to pigs” (according to Governor Dr. Raghuram Rajan) i.e. they are restructuring loans which really are not viable. But nobody seems to be bothered that this evergreening and beautification is happening right inside the RBI's CDR cell!


  1. Nobody also seems to bothered by the fallout of the way bad loans are being kicked down the road

  2. The Opportunity cost which has to be borne by everyone in the economy by way of higher priced loans

  3. Income tax paid by honest tax payers being deployed in providing more capital to banks to support bad loans.

  4. Reduced availability of credit to various sectors in the economy with small businesses being the biggest losers.

  5. Impact on monetary policy transmission.

  6. Undermining the “real” capital adequacy of PSBs, creating risk of financial instability.


Apart from the fact that the RBI is colluding with banks in dumping bad loans into the CDR system, it does not audit CDRs and has flawed benchmarks to assess its efficiency.


CDR’s efficiency is based on the number of days in which CDR is implemented. In fact, the CDR cell has a target of restructuring loans and thus, everyone in the decision making has a vested interest in seeing that CDR is implemented anyhow.


However, a very important criterion of “being efficient” is absent; i.e. deciding whether the loan facility really deserves restructuring or not? It would be more useful to recognise, say five deserving cases for CDR and restructuring them in one year, rather than restructuring 25 cases in 90 days, out of which 20 cases merely amount to applying “lipstick to the pig”. Any audit of the fate of restructured loans will open a can of worms. But is the Ministry of Finance, which needed to use the PSBs to make a success out of the Prime Minister’s pet project, Jan Dhan Yojana, really interested in finding out?

8 years ago
In a recent media report, the RBI chief has, n a manner of letting the cat out of the bag, voiced his concern that the culture of loan waivers must end. His viewpoints are seen to have been well made, with unbiased outlook.

To add a couple of more (for a serious look into):

1. The ongoing unbridled practice of , 'bailing out' - with no regard to the flip side namely, potential impact /adverse effect on the lawful rights and interests of the stakeholders- e.g. 'depositors' whose monies are siphoned off for such purpose.

2. The standard provisioning permitted, as a routine minimum for tax deduction, under the income-tax law, for 'bad and doubtful debts' , with no other criterion/or checks and balances, in place / to apply; which, in the ultimate analysis, has the obvious potential to breed other 'evils', such as corrupt practices in lending.

Besides,going by one’s quick but limited understanding, the primary /upfront responsibility to recover lies with the lending banks. Yes! Attachment of the property given as security by the borrower is, perhaps, the ultimate recourse. But then, that is going to essentially depend upon the quality /adequacy, in legal terms, of the security so given and accepted by the lender,- which, more often than not is done without , albeit a must, a mindful scrutiny and diligent investigation. For instance, just as others, ‘home loans’ if so given, - mostly impulsively, without a proper and intelligent scrutiny, so also expert vetting of the supporting documentation offered by borrowers,- on the security of the property of special kind known as, Flats or Apartments, for reasons known or ought to been known through wisdom to be gathered from past experience, are bound to be confronted with insoluble /irresolute mind -teasing legal problems/hurdles. This is an area in which it is for the Regulator to be of effective guidance, as so required through binding directives, to its constituents, to guard against possible disputes, ending up in infructuous court litigation (civil /criminal).
As may be readily imagined, RBI cannot, if so minded, fail to locate such instances from the open book of settled or unsettled ongoing court cases.
8 years ago
Do not expect this Govt to change this. Modi is an administrator, not a reformer. He will work on other improvements from the Congress regime and there is lots he will do, but expecting him to clean the public sector is a pipe dream. He loves the public sector (just see the Gujarat example of last 12 years). He will continue to pump money into this sinkhole.

The ONLY solution to this problem is to privatize. That is the only way to bring in accountability. As long as PSU bankers know that their salary and promotions and perks have no correlation with their work, they will continue to create CDRs and NPAs for filling their personal pockets. Any idiot with no financial common sense can also see why every PSU bank has NPA + restructured loans of > 10%, whereas private bank average is 3-4% and foreign bank average is below 1%.

Why does this country need to have 25-30 public sector banks?

Why does RBI allow banks a "one-time" dispensation every 5 years to restructure loans even without calling it restructured or CDR. What we see as restructured or CDR are actually 2nd leg of the problem. These crook borrowers have already benefited once through the restructuring before they get the CDR label.

The best part is that RBI guidelines, yes, RBI guidelines require that when a company goes to restructuring, none of its banks can refuse to lend more money!!! Amazing, isn't it? So if we have another Kingfisher airline tomorrow where one stupid bank is willing to sink in more money, RBI will force the other banks to do so. God help the depositor's savings in these banks and the equityholder's equity.

Jai Hind... this happens only in India
8 years ago
Once upon pole 'HEAD-LINES' were LESS COMMERCIAL BUSINESS and more GOVERNANCE,where have gone AUTHENTICITY of ?
Mahesh S Bhatt
8 years ago
Honest Pays for Rich dishonest Industrialist/Crony Capitalism drowned American Financial system & we /world is following the way more fast/dangerously.Mahesh
Rajan RG
8 years ago
I think Modi & team forgets why people has given a stable verdict for them. The expectation is the new govt should not repeat the congress govt mistakes but these people are just continuing the legacy of the congress. I thought this govt will be helpful for future generation of Indians. I lost the hope now.
Rajan RG
8 years ago
I think Modi & team forgets why people has given a stable verdict for them. The expectation is the new govt should not repeat the congress govt mistakes but these people are just continuing the legacy of the congress. I thought this govt will be helpful for future generation of Indians. I lost the hope now.
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