Reserve Bank of India (RBI) on Monday released guidelines for banks to follow while restructuring Covid-stressed loan exposures, across 26 sectors. The circular, based on the recommendations given by the KV Kamath Committee, said five financial metrics need to be taken into account while deciding on a recast plan: total outstanding liabilities/ adjusted tangible net worth, total debt/Ebitda, current ratio, debt service coverage ratio, and average debt service coverage ratio. For each of these parameters, RBI has prescribed either a floor or a ceiling.
Experts observed that some of the ratios were strict. For instance, RBI has said the current ratio and DSCR (debt service coverage ratio) in all cases shall be 1.0 and above, and adjusted SCR shall be 1.2 and above. Lenders are expected to ensure that the ratio of the total outside liabilities to the adjusted tangible networth (TOL/ATNW) is complied with when the recast is implemented.
Moreover, this ratio needs to be maintained, in all cases, as per the plan, by March,31 2022, and on an ongoing basis thereafter. However, wherever there is equity infusion, the ratio may be suitably phased-in over the period. All other key ratios shall have to be maintained as per the resolution plan by March 31, 2022 and on an ongoing basis thereafter, RBI said.
The committee sets 180 days to implement the plan and makes an inter creditor agreement (ICA) mandatory. The tenure of a loan may be extended by a maximum of two years, with or without a moratorium, the panel has said. The resolution process shall be treated as invoked once lenders representing 75% by value and 60% by number agree to invoke the same.
The central bank said 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’ to assess cash flows for FY21/FY22 and subsequent years, suggesting some degree of flexibility.
“In these financial projections, the threshold TOL/adjusted TNW and debt/Ebitda ratios should be met by FY23. The other three threshold ratios should be met for each year of the projections starting from FY22,” the report said, adding that the base case financial projections need to be prepared as part of the plan.
The sector-specific parameters may be considered as guidance for preparation of resolution plan. Also, lenders may adopt a graded approach classifying the impact on borrowers as mild, moderate and severe. “Considering the large volume and the fact that only standard assets are eligible under the proposed scheme, a segmented approach of bucketing these accounts under mild, moderate and severe stress, may ensure quick turnaround,” the report said.
Severe stress cases would require comprehensive restructuring. Exceptions to thresholds were made for five sectors — auto manufacturing, aviation, real estate, roads and trading — wholesale. Any default by the borrower with any of the signatories to the ICA during the monitoring period shall trigger a review period of 30 days.
If the borrower is in default with any of the signatories to the ICA at the end of the review period, the asset classification of the borrower with all lending institutions, including those who did not sign the ICA, shall be downgraded to non-performing asset (NPA) from the date of implementation of the plan or the date from which the borrower had been classified as NPA before implementation of the plan, whichever is earlier.