Rising NPAs in the banking industry have given birth to the Corporate Debt Restructuring(CDR) mechanism, where a lender and a defaulted borrower come together and settle their accounts. This procedure not only helps the defaulted borrowers save time from legal hassles and procedural delays, but it is also the opportunity for banks to turn their NPAs into good assets. It is a God-sent mechanism for corporates who genuinely want to settle their accounts.

The liberalization policy adopted by India in 1991 saw the birth of a new era in the Indian economy. The shift from a licensed economy to a liberal one removed the protective shield for local corporates within no time. This unexpectedly turned out to be a major shock, as all ambitious economic growth figures projected then turned out to be mere numbers on paper. Even cautious growth projections of many projects went for a toss in the new liberalized and competitive regime.

Such mounting NPAs not only made the corporates unproductive, it also narrowed down the lending capacity of the different commercial banks and financial institutions as their funds were blocked in different loss-making companies. This in turn was hampering the economic growth of the country, as funds for developmental and economically viable projects were in short supply. The growing levels of NPAs were affecting the income capability of individual banks and financial institutions.

The CDR system is a voluntary and non-statutory mechanism of restructuring corporate debts. Its objective is to develop a timely and transparent mechanism of restructuring corporate debts of viable entities. Under this mechanism, once a restructuring package has been accepted by 75% of the lenders (super-majority) based on their outstanding debt amount, the remaining lenders who are also participants to the CDR system have to fall in line with regard to the decisions taken.

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