The Reserve Bank of India (RBI) has recently unveiled a fresh framework for the resolution of stressed assets resulting from Covid-19 disruptions. Outlining specific financial ratios and providing sector-specific thresholds, this plan relates to 26 significant sectors of the Indian economy.
The KV Kamath Committee’s Recommendations
The new resolution structure is developed based on the recommendations put forth by the K.V Kamath committee. This committee was tasked with identifying key financial parameters essential to the restructuring of loans affected by the Covid-19 pandemic.
Key Financial Ratios Explained
As per the resolution plan, the five key financial ratios taken into account for loan restructuring are:
1. Total Outside Liability to Adjusted Tangible Net Worth Ratio: The ratio indicates the company’s financial leverage over its total net worth.
2. Total Debt to EBIDTA ratio: It demonstrates a company’s ability to pay back its debt through its earnings before interest, depreciation, taxes, and amortization.
3. Current Ratio: Current assets divided by current liabilities, this ratio measures the company’s ability to manage short-term debts due within a year.
4. Debt Service Coverage Ratio: Reflects the available cash to settle current debt.
5. Average Debt Service Coverage Ratio.
Sectors Covered and Eligibility Criteria
The sectors specified by the RBI include automobiles, power, tourism, cement, chemicals, gems and jewellery, logistics, mining, manufacturing, real estate, shipping among others. As for eligibility, the resolution framework applies only to those borrowers who have been financially impacted due to Covid-19. Only borrowers classified as standard with arrears less than 30 days as at March 1, 2020, qualify under this framework.
Graded Approach to Resolution and Restructuring
Lending institutions may adopt a graded approach depending on the severity of the impact on borrowers while deploying the resolution plan. Accounts can be categorized into mild, moderate and severe, as per the committee’s recommendation. Simplified restructuring may be undertaken for mild and moderate stress situations, while severe stress cases would necessitate comprehensive restructuring.
RBI’s Relief Measures for Companies Affected by Covid-19
In its Monetary Policy Report, RBI introduced numerous relief measures for companies affected by Covid-19. These include granting a one-time loan restructuring without labelling them as Non-Performing Assets (NPAs), and permitting a loan moratorium for three months on Equated Monthly Installments (EMIs) falling due between March 1 and May 31, 2020, which was later extended until August 31.
Debt Restructuring and the Indian Credit Market’s Standing
As per a report by India Ratings and Research, sectors such as real estate, airlines, hotels, infrastructure, power, and construction had the highest proportion of debt restructured. It is projected that banks are likely to restructure up to Rs. 8.4 lakh crore of loans, around 7.7% of the overall system’s credit.
Caution Needed In Forward Path
The loan restructuring should be temporary as long-term continuation may lead to inflation surge, currency crisis, and financial instability due to bad loan accumulation. Regulatory measures post-Covid-19 should be carefully rolled out and the financial sector should aim to return to normal functioning without relying on regulatory relaxations as the new standard.