Corporate loan recast roadmap, financial ratios for 26 sectors identified

Mumbai: The expert panel appointed by the Reserve Bank of India (RBI) to
suggest financial and sectoral parameters for restructuring loans taken by companies has recommended financial ratios for 26 sectors that could be factored in by lending institutions for the debt recast.

The committee headed by K V Kamath has said only those borrowers who were classified as standard (did not default) and with arrears less than 30 days as of March 1, 2020 should be eligible under the resolution framework. Banks can now adopt a graded approach based on impact severity.

“Time is of the essence at the present juncture. 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 a quick turnaround. To complete this task simplified restructuring for mild and moderate stress may be prescribed. Severe stress cases would require comprehensive restructuring,” said the expert committee report, which was released by the central bank on Monday.

The 26 sectors selected by the panel for the resolution framework are power, construction, iron and steel manufacturing, roads, real estate, trading wholesale, textiles, chemicals, consumer durables/FMCG, non-ferrous metals, pharma, logistics, gems and jewellery, cement, auto components, hotels, mining, plastic products manufacturing, automobile manufacturing, auto dealership, aviation, sugar, port and port services, shipping, building materials, and corporate retail
outlets. For sectors where ratios have not been specified, lenders can make their own assessment, the panel said.

The committee selected five financial parameters related to leverage, liquidity, debt serviceability etc. The financial parameters included total outside liability to adjusted tangible net worth, debt to EBIDTA, current ratio, debt service coverage ratio (DSCR) and average debt service coverage ratio (ADSCR).

As per the report submitted by the panel, 72 per cent debt of the banking sector has been impacted by COVID.

The committee said that the Resolution Framework may be invoked not later than December 31, 2020 and the resolution plan needs to be implemented within 180 days from the date of invocation.

“The recommendations of the Committee have been broadly accepted by
the Reserve Bank,” said the RBI.

The plan has to be prepared based on the pre-Covid-19 operating and financial performance of the borrower and impact of Covid-19 on its operating and financial performance in the first and second quarter of this fiscal and to assess the cash-flows for this, next and subsequent years.

In these financial projections, the threshold total outside liability to adjusted tangible net worth and debt to EBIDTA ratios should be met by fiscal 2023. The other three threshold ratios should be met for each year of the projections starting from fiscal 2022. The base case financial projections need to be prepared as part of the resolution plan. In respect of those sectors where the threshold parameters have not been specified by the committee, lenders can make their own internal assessments for the solvency ratios said the report.