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Lenders to work out recast plan jointly with borrowers, says RBI

As per the RBI, borrowers do not require any resolution plan in any form to be submitted to the lending institutions at the time of request for invocation.

By: ENS Economic Bureau | Mumbai | December 13, 2020 4:27:01 am
The RBI clarification ensures that recast is done early without compromising on the interests of lenders.

The Reserve Bank of India (RBI) has asked borrowers to make requests for resolution rather than working out resolution plans under the KV Kamath committee’s resolution framework to tackle Covid-related stress. The resolution plan will be worked out jointly by the lenders in consultation with the borrowers.

As per the RBI, borrowers do not require any resolution plan in any form to be submitted to the lending institutions at the time of request for invocation. “Rather, for invocation, the borrowers are required to merely submit a request to the lending institutions for being considered under the resolution framework,” the RBI said.

Thereafter, the lending institutions will take an in-principle decision — as per their board approved policy — on invoking the resolution framework. “After such invocation, the specific contours of resolution plan to be implemented may be decided by the lending institutions, in consultation with the borrower,” it said in a clarification.

Explained

To ensure restructuring is done early

The RBI clarification ensures that recast is done early without compromising on the interests of lenders. The RBI had earlier broadly accepted the KV Kamath committee’s recommendation to take into account five specific financial ratios and sector-specific thresholds for each ratio in respect of 26 sectors while finalising the resolution plans.

The RBI clarification ensures that recast is done early without compromising on the interests of lenders.

The RBI had earlier broadly accepted the KV Kamath committee’s recommendation to take into account five specific financial ratios and sector-specific thresholds for each ratio in respect of 26 sectors while finalising the resolution plans.

While for personal loans the resolution plan is to be implemented within 90 days from the date of invocation, for all other loans a period of 180 days from the date of invocation has been prescribed, the RBI said in an FAQ on resolution framework for Covid-19 related stress.

The central bank said the resolution framework may be invoked for resolution of all exposures of lending institutions to eligible borrowers, including investment exposures. “However, the resolution framework is without prejudice to all applicable guidelines issued by the relevant financial sector regulators and other Departments of the RBI in respect of any particular exposure,” it said.

The financial parameters prescribed by the Kamath Committee and notified by the RBI on September 7, 2020 are applicable only to borrowers having exposure of more than Rs 1,500 crore for resolution plans to be undertaken in terms of resolution framework. “If there are multiple lending institutions with exposure to a borrower whose resolution is undertaken in terms of the resolution framework, all lending institutions having exposure to such borrower are required to enter into ICA (Inter Creditor Agreement),” the RBI said.

“Only such resolution plans which receive a credit opinion of RP4 or better for the residual debt from a credit rating agency will be considered for implementation under the resolution framework. In case credit opinion is obtained from more than one CRA, all such credit opinions must be RP4 or better,” it said. Debt facilities/instruments with this symbol are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such debt facilities/instruments carry moderate credit risk.

The Kamath committee noted that corporate sector debt worth Rs 15.52 lakh crore has come under stress after Covid-19 hit India, while another Rs 22.20 lakh crore was already under stress before the pandemic.

This effectively means Rs 37.72 crore (72 per cent of the banking sector debt to industry) remains under stress. This is almost 37 per cent of the total non-food bank credit. The Kamath panel has said companies in sectors such as retail trade, wholesale trade, roads and textiles are facing stress. Sectors that have been under stress pre-Covid include NBFCs, power, steel, real estate and construction.

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