NEW DELHI: Companies in sectors such as retail and wholesale, textile and engineering, which were repaying loans before the Covid crisis, can expect easier repayment terms while NBFCs, energy, steel and real estate business who were struggling even before the crisis may have to face the pain of recovery action.
The RBI said Monday that it has broadly accepted the recommendations of the five-member expert committee headed by KV Kamath.
The panel has identified 26 sectors affected by the crisis and prescribed six key ratios within which the resolution plan must be finalized. For sectors not mentioned, the reasons can be decided by the individual bank. Basically, these ratios determine how much debt a company can accumulate relative to its capital and income. TNN
The 26-sector checklist has pros and cons for banks
Time is of the essence at the current juncture. Considering the large volume and the fact that only standard assets are eligible under the proposed scheme, a segmented approach of grouping these accounts into smooth, moderate and severe stress can ensure quick change. To complete this task, a simplified restructuring for mild and moderate stress may be prescribed. Cases of severe stress would require a comprehensive restructuring, ”the panel said.
For example, all sectors must have a debt service coverage ratio equal to or greater than 1. What this means is that the company must generate operating income to cover its annual debt and interest payments after the restructuring. Also, all banks are required to have a liquidity ratio of at least 1. This means that the company’s debt maturing in a year or less is on par with its assets. The only exception is aviation, where a ratio of 0.4 has been allowed, because airlines follow the cash-and-carry model for revenue purposes, resulting in near-zero debtors and higher current liabilities in the form of advances received from the clients. Additionally, airlines enjoy 6 to 9 months of supplier credit.
The 26 sectors specified by the RBI include automobiles, energy, tourism, cement, chemicals, logistics, mining, real estate, and shipping. The advantage of this checklist is that banks restructure the loans of all qualifying companies without fear of further action by law enforcement authorities if the loans fail. The flip side is that these fixed parameters could reduce banks’ room for maneuver to restructure loans for some sectors using their criteria.
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