The long-awaited recommendations from the Restructuring Expert Committee of the Reserve Bank of India (RBI) have largely received the nod from analysts, albeit with some reservations.
The committee, led by KV Kamath, presented its recommendations Monday night that span 26 sectors and has set thresholds for five indices that banks must monitor while implementing a resolution plan for stressed borrowers.
These ratios are total external liabilities to adjusted tangible equity, debt to EBITDA (earnings before interest, taxes, depreciation and amortization), current ratio, debt service coverage ratio (DSCR) and average DSCR. These ratios control the level of leverage of companies, their cash flows and whether they can recover their ability to pay the debt.
Depending on the sectors, the committee has prescribed a floor or ceiling for each of these ratios that borrowers must achieve within two years of restructuring.
What stands out is that borrowers will have to adhere to the total external liabilities to the adjusted tangible network at the time of the implementation of the restructuring, that is, fiscal year 21. What this means is that the RBI does not want the banks help over-leveraged companies that may not be viable even after restructuring.
The thresholds for the rest of the ratios must be met for Fiscal Year 22 and Fiscal Year 23.
Analysts at ICICI Securities called the recommendations broader in scope than expected. “It would allow for transparency in restructuring among lenders, while focusing on the effectiveness of the resolution plan,” wrote those at Motilal Oswal Financial Services Ltd.
That said, some believe that while the targets set by the committee are reasonable, some troubled sectors that already have high levels of bad loans may still struggle. For example, airlines may struggle to meet thresholds, and even hospitality companies may struggle. “Some of the thresholds are strict and, for the worst affected sectors, recovery depends on how quickly demand returns. That’s anyone’s guess now, “said an analyst who requested anonymity.
Indeed, banks can come up with restructuring plans for borrowers given the widespread stress the committee has also recognized. But whether lenders can finally get their money back will depend on how quickly demand in the economy recovers.
To that extent, banks with large amounts of stress provisions would be more liberal in opting for restructuring. After all, there isn’t much of a gap between the 10% provisioning required for this one-time restructuring versus the 20% required according to the June circular.
Restructuring either way would mean giving up revenue for the banks.
It is clear that the Kamath committee wants banks to check all the possible boxes before opting for loan restructuring and wants banks to protect themselves to that extent. Given past learnings, it is obvious that the regulator does not want to take any risks this time when it allows banks to restructure loans as a special waiver due to the pandemic. The five financial reasons should take care of that.
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