MUMBAI: It may not be very easy for corporates to exit from the corporate debt restructuring (CDR) scheme. Chief executive officers (CEOs) of large banks who met last week have decided not to relax the recompensation formula.
Corporates, which have restructured their loans through the CDR route, have to pay recompensation to bankers if they want early exit from CDR. As per the current formula, companies have to pay a steep price to exit CDR.
The recompensation is the price that the corporates have to pay for waivers that banks give on debt at a time when they are in difficulties. The waivers are in the form of reduction in interest rates, a part write-off in the principal loan, and sometimes conversion of debt into equity.
Most companies, which saw a turnaround in performance, have preferred to exit since the CDR rules prohibit them from expanding business without the consent of bankers. Also, companies feel that they would be in a better position to bargain fresh loans if they are out of CDR. So far, nearly 30 corporates have exited CDR, while a dozen more have approached CDR for early exit.
As per the current formula, a company has to repay the principal that lenders had scarified while restructuring the loan. Also, they have to pay interest rate which is calculated as BPLR plus term premium and credit risk premium. The interest rate is calculated on the compounded basis which is pinching borrowers. This has resulted in a steep recompensation.
As per this formula, in a particular case the recompensation was as high as Rs 300 crore when the loan size was about Rs 1,050 crore. However, in most cases, corporates have got a better deal by bargaining the recompensation drastically.
The core group committee, which is comprised of CEOs of large banks, felt that it was too early to revise the formula considering that it was approved recently (July 2007). Further, some bank chiefs were of the view that they should have fair idea of the waivers and the compromise they made have resulted in the turnaround of the company.
This is fully captured in the recompensation formula. Bankers added that they would be better positioned to bargain with corporates with the existing formula rather than revising it in favour of corporates.
Corporates, which have restructured their loans through the CDR route, have to pay recompensation to bankers if they want early exit from CDR. As per the current formula, companies have to pay a steep price to exit CDR.
The recompensation is the price that the corporates have to pay for waivers that banks give on debt at a time when they are in difficulties. The waivers are in the form of reduction in interest rates, a part write-off in the principal loan, and sometimes conversion of debt into equity.
Most companies, which saw a turnaround in performance, have preferred to exit since the CDR rules prohibit them from expanding business without the consent of bankers. Also, companies feel that they would be in a better position to bargain fresh loans if they are out of CDR. So far, nearly 30 corporates have exited CDR, while a dozen more have approached CDR for early exit.
As per the current formula, a company has to repay the principal that lenders had scarified while restructuring the loan. Also, they have to pay interest rate which is calculated as BPLR plus term premium and credit risk premium. The interest rate is calculated on the compounded basis which is pinching borrowers. This has resulted in a steep recompensation.
As per this formula, in a particular case the recompensation was as high as Rs 300 crore when the loan size was about Rs 1,050 crore. However, in most cases, corporates have got a better deal by bargaining the recompensation drastically.
The core group committee, which is comprised of CEOs of large banks, felt that it was too early to revise the formula considering that it was approved recently (July 2007). Further, some bank chiefs were of the view that they should have fair idea of the waivers and the compromise they made have resulted in the turnaround of the company.
This is fully captured in the recompensation formula. Bankers added that they would be better positioned to bargain with corporates with the existing formula rather than revising it in favour of corporates.
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