The RBI’s decision to introduce a one-time resolution framework for loans affected by the COVID-19 pandemic is a big relief to most borrowers who would have otherwise defaulted on their bank loans in the post-moratorium period. In the wake of pandemic, the RBI had announced a slew of measures to help stressed borrowers.
The committee has selected 26 sectors which will require restructuring based on its analyses of financial parameters hit due to the economic crash caused by the COVID-19 pandemic.
Who benefits from the resolution framework?
The committee has recommended financial ratios for 26 sectors which could be factored in by lending institutions while finalizing a resolution plan for a borrower.
The 26 sectors selected by the panel for the resolution framework are: Power, construction, iron and steel manufacturing, roads, real estate, trading wholesale, textiles, chemicals, consumer durables/FMCG, non-ferrous metals, pharma, logistics, gems and jewelry, cement, auto components, hotels, mining, plastic products manufacturing, automobile manufacturing, auto dealership, aviation, sugar, port and port services, shipping, building materials, and corporate retail outlets.
For sectors where ratios have not been specified, lenders can make their own assessment
How does the plan work?
The Kamath panel has proposed financial metrics to choose companies that will be eligible for the recast exercise. There are five key metrics the panel has recommended: total outstanding liability divided by adjusted net worth, total debt divided by EBITDA, debt service coverage ratio (DSCR), average DSCR, and current ratio.
The RBI has laid out strict conditions for the restructuring exercise:
Banks will have to do it in a time-bound manner. And, the resolution process has to be approved by 75 per cent of the lenders in value and 60 per cent in number. Lenders signing inter-creditor agreement (ICA) will have to set aside 10 per cent as provisions and non-signing lenders 20 per cent, which is reversible to the extent of 50 per cent on payment of 20 per cent debt and 100 per cent on payment of another 10 per cent.
A default with any one lender will lead to downgrade across lenders after a review period of 30 days from the date of implementation of the resolution plan. Banks can do the restructuring through an extension of residual tenor by maximum of two years with or without moratorium and may include conversion of loan into debt/equity. Any resolution plan for exposures above Rs 1,500 crore will be validated by an expert committee.