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Sunday, September 27, 2020

RBI selects 5 financial ratios, 26 sectors for loan restructuring

The panel undertook the process validation for the resolution plans to be implemented under this framework in respect of all accounts with aggregate exposure of Rs 1500 crore and above at the time of invocation.

By: ENS Economic Bureau | Mumbai | Updated: September 8, 2020 10:43:44 am
A sign for the Reserve Bank of India (RBI) sign is displayed inside central bank's headquarters in Mumbai, India, on Thursday, Feb. 6, 2020. (Photographer: Dhiraj Singh/Bloomberg)

Setting the stage for the mega loan recast of corporates hit by Covid-related stress, the Reserve Bank of India has 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 the Kamath panel has recommended financial parameters that include aspects related to leverage, liquidity and debt serviceability, it has said are standard on date of identification for restructuring, forensic audit may be required if the account happens to slip beyond the implementation period of 180 days to establish whether there was diversion of funds and identify malfeasance. “The recommendations of the committee have been broadly accepted by the Reserve Bank,” RBI said.

The panel undertook the process validation for the resolution plans to be implemented under this framework in respect of all accounts with aggregate exposure of Rs 1500 crore and above at the time of invocation. While the six-month moratorium on loan repayments ended on August 31, the RBI has allowed banks to recast loans which were classified as standard as on March 1, 2020. Banks have already started working out the details of recasting retail and small loans. The central bank said signing of Inter Creditor Agreement is a mandatory requirement for all lending institutions in all cases involving multiple lending institutions, where the resolution process is invoked. The requirement of additional provisions if the ICA is not signed within 30 days of invocation does not substitute for the mandatory nature of ICA, RBI said.

The RBI has also finalised sector-specific thresholds or ceilings for each of the above key ratios that should be considered by the lending institutions in the resolution assumptions with respect to an eligible borrower. In case of those sectors where the sector-specific thresholds have not been specified, lending institutions should make their own internal assessments regarding total outside liabilities to adjusted tangible net worth and total debt to EBITDA ratios. However, the current ratio and debt service coverage ratio in all cases should be 1.0 and above and average debt service coverage ratio should be 1.2 and above.

The RBI said lending institutions are free to consider other financial parameters as well while finalizing the resolution assumptions in respect of eligible borrowers apart from the above mandatory key ratios and the sector-specific thresholds that have been prescribed. “The ratios prescribed are intended as floors or ceilings, as the case may be, but the resolution plans shall take into account the pre-Covid-19 operating and financial performance of the borrower and impact of Covid-19 on its operating and financial performance at the time of finalising the resolution plan to assess the cashflows in subsequent years, while stipulating appropriate ratios in each case,” it said.

Given the differential impact of the pandemic on various sectors or entities, the lending institutions may, at their discretion, adopt a graded approach depending on the severity of the impact on the borrowers, while preparing or implementing the resolution plan, the RBI said. Such graded approach may also entail classification of the impact on the borrowers into mild, moderate and severe, as recommended by the panel, it said.

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