MUMBAI : Loans that were in arrears for more than 30 days on March 1, but in which the overdue amount was later repaid will not be eligible for debt consolidation under the new debt consolidation window, the Bank has clarified of the Indian Reserve.
The central bank published a series of frequently asked questions along with its answers late Tuesday night, clarifying its position on a number of issues. The RBI has set March 1 as the benchmark date for deciding the eligibility of borrowers under the new resolution framework.
“Such accounts are not eligible for resolution under the resolution framework, as the resolution framework is applicable only to eligible borrowers who were classified as standard, but not in arrears for more than 30 days as of March 1, 2020 “he said, adding that banks have to use the June 7, 2019 circular to restructure such loans.
Since the debt recast window was announced, bankers have maintained that they are open to using the June 7 framework for stressed assets ineligible under the new framework. However, what distinguishes the new framework from the existing one is the benefit of maintaining a standard asset classification despite a recast, leading to lower provisions. Banks have to make provisions of 15% when loans turn bad, as opposed to 0.4-1% for standard loans. Mint reported that at least ₹5.7 trillion of loans under stress conditions will not be covered by the new framework.
The central bank also said that while March 1, 2020 is the reference date, the actual debt considered for resolution will be the amount outstanding as of the invocation date. The invocation date refers to the date the borrower and the lender agree on the resolution plan and the RBI has set a December 31 deadline. Lenders have up to 180 days to implement a corporate debt consolidation and 90 days for retail loans from the invocation date.
The RBI said banks and financial institutions can use the resolution framework to resolve all exposures to eligible borrowers, including investment exposures.
A central bank committee formed to recommend debt consolidation parameters presented its report last month. Following the committee’s report, the RBI had said that banks must ensure that restructured loans meet specific financial parameters by March 2022.
In its report, the five-member panel headed by former ICICI Bank CEO KV Kamath identified five financial parameters to assess the health of struggling sectors.
These include total external liabilities to adjusted tangible network, total debt to earnings before interest, taxes, depreciation and amortization (Ebitda), debt service coverage ratio (DSCR), current ratio, and average debt service coverage ratio. debt (ADSCR). The committee presented its report to the RBI on September 4, and its recommendations were widely accepted.
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