Banking Arrangement

How Banks help Stress Companies

Whenever any company faces difficult times the first impact will be felt on cash flows. The company has to prioritize the payments to various stakeholders depending on the urgency. First preference goes to clearing bank dues then creditors/suppliers of raw material and other key areas essential for survival of the company. Employees at management level feel the brunt with delayed salaries and demoralized environment. It really takes lot of effort from company and banks to revive the stress company.

Banks, being key stakeholders, try to assess the impact of the problem on company and its nature i.e., whether it is short-term or long-term. Banks try to help the company in 3 steps.

First Step

In majority of the cases, low revenue realization due to deteriorated condition of the company and receivable pile-up causes cash flow mismatch. In these scenarios, banks try to assess working capital limits and see whether any scope is there for additional funding. Each bank follows its own policy and credit guidelines and accordingly may or may not sanction additional loans.

Second Step

If bank has small exposure to the company and number of banks involved are small then banks may try for bilateral restructuring. In a bilateral restructuring, agreement happens between company and individual bank. There will be no common agreements or documentation among banks. After satisfying itself with feasibility of company’s business model,  banks may try various methods to restore the cash flow in the company. Some of the measures include reducing the interest rates, rescheduling of loan payments, sanction of new loans, conversion of non fund limits to fund based limits etc.

The idea is to give some breathing space to the company to tide over downturn. Whatever concession bank provide have to repaid by company if it wants to come out of restructuring.

Third Step

If banks have large amount of exposure and security of the company is shared among banks then banks try to implement the restructuring through Corporate Debt restructuring mechanism (CDR).

In a CDR setup, many banks come together and implement the restructuring package on common terms and through common documentation. Banks may undertake economic feasibility study of the restructuring package and if found satisfied may agree for extending various types of concessions and products and services as described in second step. Any major decision has to be approved by 75% of lenders by value and 60% by volume.

Banks have to complete the process within stipulated times and company has to adhere to the conditions like routing of cash flows, stopping of dividend payout, meeting the milestones as suggested and stipulated by banks.