Gauging intentions

The article, “Throwing good money after bad” (June 8) by Rajeswari Sengupta and Anjali Sharma, discusses a key concern: What prompted lenders to finance “economically unviable” firms which did not have a non-performing asset recovery mechanism in place?

Has Corporate Debt Structuring (CDR), a voluntary non-statutory system introduced in 2001, failed to reorganise the outstanding obligations in relation to cases of substandard and/or doubtful accounts within the stipulated period?

While CDR allows a distressed company with two or more lenders and a debt of more than ~10 crore to restructure into equity or preference capital, average borrowing by category 2 and category 3 firms — as classified by the authors — has increased from ~5.5 billion to ~6.3 billion in the post-CDR period, with an increase in average leverage from 57.9 per cent to 62.7 per cent in the same period. This indicates there might be lack of diligence in credit appraisal and lending terms prior to restructuring debt obligations — independent assessment by a competent agency not conducted — that vitiates the essence of regulatory forbearance for viability assessment and formal processes of the Insolvency and Bankruptcy Code, 2016.

To avert this situation, the central bank initiated Prompt Correction Action. Factors such as interest coverage ratio, leverage ratio and return on assets or profitability need to be taken into consideration to decide the firms’ intention or ability to repay the loan.

Kushankur Dey Bhubaneswar