Indian companies now have a relatively favourable debt-equity ratio vis-a-vis 20 years ago, and this will help them withstand the pandemic-related stress better, according to veteran banker KV Kamath. He felt that a large number of Covid-19-hit companies may need a helping hand from lenders for restructuring their accounts as per the ‘Resolution Framework for Covid-19-related Stress’. In an interaction with BusinessLine , Kamath, who is the Chairman of the Reserve Bank of India-appointed Expert Committee on Resolution Framework for Covid-19 related Stress, said majority of the accounts will be in the “mild to moderate” stress category, requiring a “light-touch” helping hand from lenders. Excerpts:

Why did the committee prescribe sector-specific thresholds within the five financial ratios only for 26 sectors?

There are very many sectors, running into a few hundred. So, that makes it virtually impossible (to prescribe sector-specific thresholds within the five ratios for each sector) and the (banking system’s) exposure to each of these sectors gets smaller and smaller. So, we took 26 sectors, which accounted for 60 per cent of the systemic assets, which qualify as per the laid down parameters. So, it was just a question of an ‘ABC’ analysis by putting down what is possible for a set of large number (of accounts) by value and reasonable number in terms of sectors. As for the other sectors, we have provided the way forward for the banks to look at.

How did you zero-in on the five financial ratios?

I told my committee members that we all need to go back 30 years to the time when we were actually doing credit appraisal. What would we have been looking at in a company? And this is the mindset that we had…So, we said first we would look at debt-equity, which is the capital ratio. We would look at Debt Service Coverage Ratio, which is the coverage ratio, and liquidity ratio, which is the current ratio. These are three sacrosanct ratios for working out this. So, overall, we zeroed-in on five ratios. We also then discussed with the credit rating agencies, got inputs from them and decided on these ratios

How will the ratios and cash flows tie-in?

For working out a resolution plan, any bank sitting with the borrower and recasting the cash flow cannot do so in isolation. Banks will have to project the cash flows for the period of the loan outstanding. And in that they will have to recognise the pain in the system and the individual entity…And based on that, they project the cash flows…If the ratios are not met then will have to correct by re-working the cash flows to that extent.

What quantum of assets could come up for restructuring?

We will have clarity after the second quarter numbers are known. This will mean, as of today, maybe six weeks from now. Within the first two weeks of the quarter ending, we will have numbers for about 500 companies. That should give us leading indicators of what is happening and how many will come (up for restructuring). I think a large number may need a helping hand. Whether it is a light-touch or a heavy sort of hand-holding, we will come to know between six to eight weeks from now.

Why did the committee suggest a graded approach while preparing or implementing the resolution plan?

We put that in basically as a construct for the banks to look at, and they could decide what it would be. But in this case, I would think, a large part (of the companies) would be in the “mild to moderate” stress buckets. Only a small part will be in the “severe” bucket. And the pain sectors, which saw the deepest impact of lockdown initially, we have already identified – real estate, construction, aviation, hotels.

These three or four sectors will feel the pain and they will need a longer and deeper helping hand within the two year construct.

Do Banks need to change the way they lend to corporates in view of the Covid-19-related shock?

As far as corporate lending side is concerned, the key problem that was there 20 years back was that companies believed in very high leverage ,and the banking sector also believed in very high leverage. In 2000, debt-equity ratio of a company used to be 4:1; then by 2010 it became 2:1; and now they are all healthier companies (most companies have debt equity ratio of less than 1). Companies have much better ability to withstand this (Covid) shock than they would have had 10 years back.

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