Lenders are likely to use the deep restructuring allowed by the KV Kamath committee’s recommendations sparingly, and may instead choose to offer an extended moratorium and long repayment periods to borrowers to avoid haircuts.
Lenders may prefer to allow borrowers more leeway to make repayments, in anticipation of better cash flows, rather than dividing debt into sustainable and unsustainable tranches as has been done in the past, which generally involves taking a significant cut in unsustainable debt, senior bankers and industry experts said.
The RBI established a committee of experts led by Kamath to recommend parameters for restructuring stressed loans. The committee submitted its report to the RBI on September 4, and its recommendations have been widely accepted. “It’s a combination of covering as many companies as possible without going overboard,” said CS Setty, MD, State Bank of India.
Lenders will consider using the moratorium to change repayments for stressed borrowers, and the amount will depend on the impact the pandemic has had on their cash flows, Setty said.
“Cuts occur in a situation where operations are inherently unviable and when banks also have to cut interest rates, which affects the net present value (NPV) of the loan,” he said.
RBI has allowed lenders to take a gradual approach based on the degree of covid impact on a borrower. Bankers said deep restructurings will only be used for companies under severe stress. In such cases, the unpaid interest component could be converted to an interest-financed term loan (FITL). FITL is a new loan that helps stressed borrowers pay off existing interest over time and is used in most deep recasts.
“We note that in the past cycle, the restructuring rules were liberal and the banks had a lot of discretion, which led to about 70% of the restructured accounts being converted into NPAs (non-performing assets). With only a maximum two-year extension for residual tenure and prudent restructuring metrics recommended by the committee, the scope of using restructuring as an always-green tool is less, “CLSA analysts said in a note.
RBI said banks must ensure that restructured loans meet specific financial parameters by March 2022.
NS Vishwanathan, a former deputy governor of the central bank, believes that the aim of the 6 August circular and the appointment of the Kamath committee is to avoid the shortcomings of previous restructuring systems by “ensuring that the ease of debt resolution with benefits of Asset classification was extended only to those borrowers who would not have been in default had it not been for the impact of the COVID-19 pandemic and would be viable after the debt consolidation. “
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