Reserve Bank of India today released the report of the Committee led by KV Kamath, which recommended that financial parameters be taken into account in resolution plans under the ‘Resolution Framework for Covid-related Stress19’ along with specific reference ranges. sector for those parameters.
The committee recommended financial ratios for 26 sectors that could be considered by lenders while finalizing a resolution plan for a borrower. Financial aspects include those related to leverage, liquidity, and debt service capacity.
The RBI announced, on August 7, 2020, the constitution of a Committee of Experts under the chairmanship of KV Kamath to make recommendations.
He had asked the panel to recommend a list of financial parameters, including leverage, liquidity and debt service capacity, to decide on the resolution plan. The committee will also review the resolution plans for all accounts where the exposure is greater than ₹1,500 crore.
Kamath’s panel selected the following sectors in order to recommend financial parameters to be considered in the resolution plan:
1 power
2 Construction
3 Iron and steel manufacturing
4 paths
5 Real Estate
6 Wholesale trade
7 Textiles
8 chemicals
9 Durable Consumer Goods / FMCG
10 non-ferrous metals
11 Manufacture of pharmaceutical products
12 Logistics
13 gems and jewelry
14 cement
15 Auto Components
16 Hotel, Restaurants, Tourism
17 Mining
18 Manufacture of plastic products
19 Automobile manufacturing
20 Car dealer
21 Aviation
22 Sugar
23 Port and port services
24 Shipping
25 building materials
26 corporate points of sale
“The Committee’s recommendations have been widely accepted by the Reserve Bank. Consequently, the Reserve Bank today issued a follow-up circular to the guidelines of the Resolution Framework announced on August 6, 2020, specifying five specific financial ratios and the sector – specific thresholds for each index with respect to 26 sectors to be taken into account when finalizing resolution plans, “the central bank said in a statement.
With regard to other sectors where certain ratios have not been specified, lenders will make their own assessment taking into account the outlines of the circular dated August 6, 2020 and the follow-up circular issued today, the circular added.
The committee panel recommended that lenders mandatorily consider Total Outstanding Liabilities / Adjusted Tangible Equity, Total Debt / EBITDA, Current Ratio, Debt Service Coverage Ratio, and Average Debt Service Coverage Ratio.
The signing of the pact between creditors will be mandatory to invoke the resolution of the debt. To assess compliance with the agreement between creditors it is necessary in the supervisory review. Lenders are free to consider other financial parameters in addition to the five mandatory, according to the report.
The panel also recommended that the debt service coverage ratio be equal to or greater than 1 in all eligible cases. Banks must consider the financial state of the company before Covid and the impact of Covid to finalize the recast plan.
However, only borrower accounts will be eligible for resolution that were classified as standard, but not in arrears for more than 30 days with any lender as of March 1, 2020.
According to RBI, the resolution framework can be invoked no later than December 31, 2020 and the plan must be implemented within 180 days from the invocation date.
In addition, banks can restructure loans of more than ₹Rs 10 crore lakh is largely attributed to 5-6 critical sectors, including aviation, commercial real estate and hospitality, which have been severely affected by the Covid-19 outbreak, according to bankers.
Finance Minister Nirmala Sitharaman last week asked banks and NBFC to implement a one-time loan restructuring scheme for Covid-19-related stress by September 15.
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