Not all customers who have defaulted repayment to the commercial banks and contributed of the burgeoning NPA of these banks are willful defaulters. Quite a few are described as "Sunset" industries. Others have become weak due to changes in external environment, due to delay in execution of the project, due to cost escalation or on account time-up needed to develop an optimum share for the product. These accounts are classified as "NPAs" no doubt, but these pertain to a different category, where hasty coercive action or forced recovery measures cannot be justified. Lenders have an obligation, to consider genuine difficulty of borrowers. If this principle is not accepted the purpose of bank financing industries and other sectors of economy loses the definition "development finance" and becomes reduced to mere money lending.

Successful reconstruction of an ailing unit that has defaulted repayment and bringing it back to standard assets, is also a strategy for dealing with NPAs without causing pain to the defaulted borrower. The process is primarily rescheduling the debt portfolio of the borrowers among its creditors to help the borrowers in the revival of projects and continue operations through reductions in existing debt burden and establishment of new credit lines with implied assumption that the lender would prefer reduction in risk to optimization of returns. The objective of the CDR is to ensure a timely and transparent mechanism for restructuring of the corporate debts of viable corporate entities affected by internal and external factors, outside the purview of BIFR, DRT or other legal proceedings, for the benefit of all concerned.

Considering this commitment on the part of the banks the Finance Minister made a policy statement about "Corporate Debt Restructuring in his budget speech for the year 2000-01 as under:/

"To deal with forces of competition, industrial and other companies require restructuring on a continuous basis. For this purpose it is essential to promote out of court mechanisms for timely and transparent corporate debt restructuring of viable entities, in addition to the use of legal avenues of financial restructuring. A mechanism for Corporate Debt Restructuring (CDR) has been set up under the guidelines issued by the Reserve Bank of India. I have decided to set up a small group consisting of bankers and others, under the chairmanship of Deputy Governor, Reserve Bank of India to suggest measures to make its operation more efficient."

The basic approach as per the finance ministers statement comprises of the following features:

1. Corporate Debt Restructuring (CDR) needs providing an on-going and permanent mechanism, and should not be on an ad-hoc or case to case approach

2. The Scheme to provide for out-of-court mechanism

3. It should be timely and transparent

4. It should operate as per guidelines of RBI

The committee constituted by the Finance Minister submitted its findings and recommendations. In pursuance there of RBI, in August, 2001, advised the Banks/ All India Financial Institutions to implement Corporate Debt Restructuring (CDR) System. The objective of the System is to ensure timely and transparent mechanism for restructuring of corporate debts of viable entities affected by certain internal and external factors and which are outside the purview of BIFR, Debt Recovery Tribunals (DRTs) and willful defaulters' list.

CDR is a non-statutory voluntary mechanism based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA) and will cover only multiple accounts/syndication/ consortium of accounts with outstanding exposure of Rs.200 million and above by Banks/Institutions. The system will be applicable only to standard and sub-standard accounts. However, potentially viable cases of NPAs will get priority. In no case, the request of any corporate indulging in willful default or misfeasance will be considered under CDR.

Broad outlines of the Scheme as per guidelines issued by RBI are as under:

The CDR system was envisaged to have a three-tier structure comprising the CDR Standing Forum, CDR Empowered Group and the CDR Cell. The Forum would be representative general body of all FIs and Banks and would comprise of CEOs of the members. A Core Group of eight members comprising Chief Executives of IDBI, ICICI, SBI, IBA, Punjab National Bank, Bank of India and Bank of Baroda and Executive Director, RBI was also provided to be carved out of the Forum to act on its behalf for operational convenience.

The CDR Empowered Group will consist of Executive Director (ED) level representatives of IDBI, ICICI and SBI as standing members, in addition to ED level representatives of financial institutions and banks, who have an exposure to the concerned company. The Group is mandated to approve restructuring within a specified time-frame of 90 days.

The CDR Cell will assist the CDR Standing Forum and the CDR Empowered Group and extend all secretarial assistance for their smooth operations.

Legal basis for the mechanism will be provided by ICA. All participants in the CDR mechanism shall have to enter into a legally binding ICA with necessary enforcement and penal clauses.

CDR Forum has started functioning. CDR Cell has been formed with officers deputed from IDBI. The first meeting of the CDR Standing Forum was held on November 13, 2001 when the CDR Standing Forum, CDR Core Group and CDR Empowered Group were formally constituted by the members present. Shri P.P. Vora, CMD, IDBI was elected the Chairman of the Forum and the CDR Core Group. The Core Group met twice on December 6, 2001 and on January 31, 2002. The CDR Empowered Group has also met twice so far. While the first meeting mainly discussed the procedural matters / formats for obtaining information, the second meeting considered the flash reports from four companies.

A meeting of the CDR Standing Forum was held on February 25, 2002 mainly to extend the CDR umbrella to the private sector banks and foreign banks and to sign the ICA. In all, 63 PSU banks, AIFIs, private sector banks and foreign banks attended the meeting and 49 out of those, comprising 8 AIFIs, 26 public sector banks and 15 private sector banks signed the ICA.

By way of summarising the main features of the CDR mechanism are

1. it would be a voluntary system based on debtor-creditor agreement and inter-creditor agreement,

2. the scheme will not apply to accounts involving only one financial institution or one bank; instead, it will cover multiple banking accounts/ syndication/consortium accounts with outstanding exposure of Rs. 20 crore and above by banks and institutions,

3. the CDR system would only be applicable to standard and substandard accounts, with potential cases of NPAs getting a priority.