Financial parameters included total external liability to adjusted tangible equity, debt to EBIDTA, current ratio, debt service coverage ratio (DSCR), and average debt service coverage ratio (ADSCR) ” Timing is of the essence in the current climate Considering the large volume and the fact that only standard assets are eligible under the proposed scheme, a segmented approach of grouping these accounts under mild, moderate and severe stress can ensure rapid turnaround. To complete this task, a simplified restructuring for mild and moderate stress can be prescribed. Stress cases would require a comprehensive restructuring, “the committee said.
The RBI had formed a five-member committee under the chairmanship of former ICICI Bank CEO KV Kamath to make recommendations on the financial parameters to be considered in the restructuring of loans affected by the Covid 19 pandemic. Other members of the The committee are former State Bank of India Executive Diwakar Gupta, current Canara Bank TN Manoharan chairman, consultant Ashvin Parekh and Indian Banks’ Association (IBA) Executive Director Sunil Mehta, who was also the committee’s secretary. The committee will also examine the restructuring of loans above Rs 1,500 million. The committee’s mandate has been extended until June 30, 2021.
The committee has recommended specific sectoral thresholds for each ratio for 26 sectors that should be considered when finalizing resolution plans. With regard to other sectors where certain ratios have not been specified, lenders will make their own assessment taking into account the contours, the RBI said in a press release. The committee has recommended sector-specific parameters that it said can be considered as a guide for preparing a resolution plan for a borrower in the specified sector. The plan should be prepared based on the borrower’s operational and financial performance prior to Covid-19 and the impact of Covid-19 on its operational and financial performance in the first and second quarters of this fiscal year and to assess cash flows for this, the following year and the following.
“In these financial projections, the total external liability threshold at adjusted tangible net worth and the debt-to-EBIDTA ratios must be met for fiscal year 2023. The other three threshold ratios must be met for each year of the projections beginning in the year fiscal 2022. The base case financial projections should be prepared as part of the resolution plan, “the committee said. For those sectors where the committee has not specified threshold parameters, lenders can conduct their own internal assessments for credit ratings.
The total external liability to the adjusted tangible equity ratio is the sum of long-term debt, short-term debt, current liabilities and provisions together with the deferred tax liability divided by the net tangible equity of investments and loans in the group and external entities. “The committee has uniformly proposed thresholds for the current index, DSCR, and ADSCR … eligible borrowers under the current framework are standard accounts and as such may need some time to restore their position to pre-Covid levels. -19, “the committee said. said.
The current ratio is the current assets divided by the current liabilities, while the debt service coverage ratio (DSCR) is the sum of the net cash accruals together with the finance charges and interest divided by the sum of the portion. current long-term debt with finance charges and interest. Average Debt Service Coverage Ratio (ADSCR) is the sum of net cash accruals along with finance charges and interest divided by the sum of the current portion of long-term debt with finance charges and interest during the loan period.
The committee did not prescribe any current ratio thresholds for the automotive sector due to the “just-in-time inventory” business model for raw materials and parts, and finished goods inventory is financed through available channel financing from distributors. In the case of aviation, the current ratio has been kept at 0.40 and more due to its cash and carry model and higher current liabilities in the form of advances received from customers, which are approximately two months of annual sales of the aircraft. airline industries. For the real estate sector, the committee has recommended considering the parameters at the project level rather than at the entity level.
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