Wednesday, August 15, 2012

A Review and Analysis of the CDR Mechanism

The out-of-court approach for corporate debt restructuring (CDR) was instituted by the Reserve Bank of India (RBI) over a decade ago. While it has been successful in several cases, there have also been significant shortcomings with the CDR mechanism.
In a recent speech, a Deputy Governor of the RBI undertakes a review of the CDR mechanism. A number of issues are examined in the speech, including –
- reasons for the large numbers of restructurings;
- excessive leveraging by borrowers, coupled with slowdown in the economy;
- lack of transparency in the restructuring process;
- the disproportionate burden assumed by the public sector banks; and
- operation of the moral hazard problem, leading to misuse of the CDR process by borrowers.
These and other issues, including the way forward are considered in the speech.
Although the CDR mechanism, despite its flaws, has helped in turning around companies, any review efforts can only be piecemeal in nature. The absence of a comprehensive and functional law on corporate insolvency in India will continue to be sorely felt.

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