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CHAPTER SEVEN
Credit Monitoring, Sickness and Rehabilitation
Understand why credit needs to be monitored after disbursal
Learn to recognise symptoms of sickness/triggers of financial
distress
credit sanction is made. After the credit sanction is made, and the
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principal and interest are fully recovered. Loan review is, therefore,
a vital post-sanction process.
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riskier clients. Thus, rather than dedicating equal time to all credit
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When the borrower turns sick, the bank will have to investigate (a)
the reasons for sickness, and whether remedial measures can
revive the ailing firm; (b) the rationale for categorizing the borrower
as sick; (c) the risks involved in rehabilitating the borrowing firm
decay in the cash inflows. Due to this decay, even though the firm's
balance sheet could show a healthy level of current and fixed
receivables, but these are not realizable. Or, inventories look high
but the quality is poor and items are non-moving, and due to low
profitability the firm does not write them off. Or, due to continuous
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losses, the firm does not provide adequate depreciation, and the
fixed asset balances seem high. In fact, in these cases, the assets
are rapidly losing market value, which is not reflected in the balance
sheet. Thus, a situation finally arises when the firm's assets are not
all realizable, the cash flows are thinning out, and revenues have
not been covering expenses over a period of time. If such a state
prolongs, economic failure could occurthe rates of return from
investments drop below the cost of capital (COC), and the market
There are several factors that lead to financial distress in firms. Any
of the risk factors listed in Annexure I of Chapter 5 could turn a
reality, and cause a firm to fail. The factors could range from
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been thoroughly tested and widely accepted, the model scores over
various others that have been subsequently developed and used
for predicting bankruptcy.4
where
What are the model's attributes that lead to its continued validity in
most cases? The model is based on two important concepts of
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suffers when too many assets are held on the firm's balance sheet,
disproportionate to the operating requirements and the sales
that the firm's equity is publicly traded and second, that it is a firm
engaged in manufacturing activities.
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liquidation value, the smaller the net cash flows, and the higher
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An illustrative list of warning signs that banks should look out for is
provided in Annexure I.
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The loan workout function should assemble the best skills. Each
situation will require a specific skill or combination of skills, such
as real estate, legal, credit assessment, financial analysis,
merchant banking, collateral evaluation and basic project
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The workout officers examine the updated credit file, and meet with
the borrower to explore if the impaired credit can be revived and
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restructured (past) debts should not exceed 7 years from the date
of implementation of the relief package. During the period of
allow the sick firm to withdraw funds from the cash credit account at
least to the extent of deposit of sale proceeds by the firm. This is
called a holding operation, ensuring that the firm is not starved for
finance during the implementation period of the rehabilitation
package.
The broad parameters for grant of relief and concessions for revival
of potentially viable sick SSI units are as follows: (also applicable to
MSME)
1. Term loans
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Any fresh term loans sanctioned for revival of the firm will
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implemented, the firm may continue to incur cash losses, till the
cash break even is reached. These cash losses can also be
funded by the bank and by other participating institutions.
will have to assess the working capital needs as for any other
borrower (as explained in Chapter 5), but can grant the credit at
1.5 per cent below the prime lending rate.
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Rs. 60 lakhs
Rs. 20 lakhs
rehabilitation
implementation (AB)
Rs. 40 lakhs
Step 2
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Rs. 32 lakhs
Rs. 8 lakhs
Rs. 32 lakhs
Rs. 8 lakhs
cash losses
irregularity (CD)
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and other monetary sacrifices made by the bank, once the firm is
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Committees
In order to deal with the problems of co-ordination for rehabilitation
of sick Micro and Small (MSE) units, State Level Inter-institutional
Committees (SLIICs) have been set up in all the states. The
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restructuring.
Credit management in a bank consists of two distinct
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accepted, the model scores over various others that have been
subsequently developed and used for predicting bankruptcy.
The aims of establishing a separate workout function are
cash losses. Bank X found the firm potentially viable and hence
decided to rehabilitate the firm. One year after implementation
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could endanger the bank's ability to collect its dues from Firm B.
1. The firm has used the money given by your bank for working
capital to buy plant and machinery.
asset value, which has not been carried out in the current
year
7. The firm had taken over a firm in the same line of activity a
year ago
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What are the circumstances under which the lender may fail to
perform a financial analysis of the borrower? Why is financial
analysis so vital to credit management?
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2. Technology related
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and implementation
Inadequate working capital due to diversion of funds or faulty
estimation of requirements
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The credit limits are always utilized to the brim, and the firm
approaches the bank frequently for ad hoc increases in
credit limits
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Who Is Not Eligible? The following are the ones not eligible:
SMEs who are involved in wilful default, fraud and malfeasance.
SMEs classified by banks as loss assets.
Viability Benchmark The rehabilitated firm should turn financially
viable in 7 years, with the repayment period for the restructured
debt not exceeding 10 years.
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Cases pending under the BIFR and the Debt Recovery Tribunal
are also considered for CD, if such accounts are very large and
have been recommended by the CDR Core Group
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schemes operated for SSI sector (see Section II of the chapter) and
the SME sector.
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body, which will lay down policies and guidelines and monitor
the progress of CDR. The forum will also provide an official
The CDR core group would lay down the policies and guidelines
to be followed by the CDR empowered group and CDR cell for
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between the IRR (internal rate of return) and the COC, and the
extent of sacrifice. If restructuring is not found viable at this
stage, the creditors would be free to initiate recovery
proceedings.
The CDR cell: The CDR standing forum and the CDR
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The ICA signed by the creditors will be initially valid for a period
of 3 years and subject to renewal for further periods of 3 years,
thereafter. It is to be noted that foreign lenders are not a part of
the CDR system.
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limitation and also that he will not approach any other authority
for any relief and the directors of the borrowing company will not
resign from the Board.
Of these, the iron and steel sector has accounted for a lion's share
of about 36 per cent. This is primarily due to CDR Group having
In this annexure, we will also study how two companies could turn
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Source: http://www.cdrindia.org
TABLE 7.2 INDUSTRYWISE DISTRIBUTION OF APPROVED
CASES UNDER CDR (AS ON 31 MARCH 2009)
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Source: http://www.cdrindia.org
Case Study I: India Cements Ltd
Need for Restructuring When India Cements Ltd submitted a
CDR proposal to the FIs at the end of 2002, it had stated that the
bunching up of debt repayments over the next few years and
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been hardly able to meet its debt and preference capital obligations
of Rs. 729 crores for the year (including repayment and interest).
India Cements Debt Restructuring India Cements mandated
and then settle certain loans and interest and pressing creditors. It
also created a contingency fund to meet any shortfall in Visaka's
divestment realization. The balance bank borrowings were to be
restructured along with term debt such that the entire outstanding
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interest rates from 2 per cent for FY2003 to 50 per cent for FY2012.
Accordingly, the debt repayment schedule of India Cements and
Rs. 371 crores, Rs. 470 crores and Rs. 376 crores for 20072008,
indicated the company's inability to meet its debt obligations.
next year. The net profit was projected to increase to Rs. 31 crores
in 20042005, Rs. 75 crores in 20052006, Rs. 52 crores in
20062007, Rs. 26 crores in 20072008, Rs. 14 crores in
20082009, Rs. 10 crores in 20092010, Rs. 20 crores in
20102011 and Rs. 42 crores in 20112012.
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The net profit of Rs. 112.59 crores for the quarter ended 30 June
2006 is the highest ever profit made by the company. The good
demand for cement and the favourable prices are expected to last
for about 23 years, according to the company sources. Aided by
this trend, the company wiped out its accumulated losses by the
third quarter of 2006.
1,280 crores, of which about Rs. 500 crores would come under the
CDR scheme. India Cements hoped to repay a substantial portion
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of this high-cost debt during the year, thus, bringing down its
average cost of borrowings from 10.5 per cent. The debt equity
stood at 1.4 in March 2007, and fell to 0.6 in March 2009.
Source: www.indiacements.co.in
CASE STUDY II : PRIVATE EQUITY AND CDR
Kitply Industries29
When India Debt Management, a group company of Hong
into the ailing Kitply Industries in April 2008, it heralded a new trend
in the CDR mechanism. It signified not only restructuring but also a
change of management at the plywood firm that owns the popular
brand Kitply.
The private equity funds brought in will be used partly to repay the
lenders to Kitply and partly to revive its operations. The company
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be used to repay the lenders, while the balance Rs. 4045 crores
would be infused as equity into the company. While some of the
lenders have already sold their loans to Asset Restructuring
Company of India (Arcil), other lenders like ICICI Bank, SBI and
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