Lenders set strict terms for promoters of debt-laden companies

KOLKATA: Taking a leaf out of RBI governor Raghuram Rajan's stern message against defaulters and failed managements, lenders have started tightening their purse strings and turning ultra cautious in offering loan restructuring to promoters who have run businesses aground.

Lanco Infratech's 7,500-crore debt restructuring proposal may not get an easy passage as banks are reported to have sought more details from the highly leveraged borrower with a consolidated debt burden of over 46,200 crore, which is nearly three times its gross revenue in 2012-13.

"With the rise in defaults, lenders are on their toes,'' said RK Bansal, executive director of IDBI Bank and chairman of Corporate Debt Restructuring (CDR) Cell. "Lenders are taking more careful steps while restructuring loans as they are careful with cases where there has been a diversion of funds."

In recent months, lenders have decided to go ahead with restructuring on a loan only after they have ascertained that the project is viable and that the promoter has not siphoned off funds, or diverted funds to any other project. Also, lenders are now seeking upfront commitment from borrowers in form of guarantee from kith and kin and higher contribution. "At CDR, we have made it mandatory that promoters' contribution - pegged at 25% of the sacrifice made by banks - should be made upfront and if the borrower fails to repay, the CDR package is withdrawn. Lenders can then go ahead with legal action for recovery of loan," Bansal said.

In case of KS Oil and Zoom Developers, lenders had agreed to revive the company but due to differences among them and also with the promoters, the restructuring failed. Lenders have refrained from even admitting companies into CDR whenever they were suspicious. For example, banks had rejected CDR proposals from Deccan Chronicle and Winsome Diamonds where forensic studies into accounts show that it was not the economic conditions that led to business collapse, but mismanagement.

"There have been groups which have never shown consistency on servicing loans but used to get a fresh line of credit on regular intervals,'' said Robin Roy, associate director for financial services at PwC India. This aspect needs to be looked at with the right earnest and there is a need for regular monitoring and using early warning system to pre-empt such a situation."

After Rajan's statement, banks have started looking at change of management as a strategy to keep the loan account running. "(RBI) Governor's statement should act as a potent threat to dishonest promoters that they cannot take banks for granted in case of mismanagement and diversion of funds," said Deepak Narang, executive director at the state-run United Bank of India.

"Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalise their failed ventures," Rajan had said soon after becoming RBI governor.