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The Reserve Bank of India has specified five key financial parameters that lenders must consider before finalising resolution plans (RP) for eligible borrowers in 26 sectors, ranging from auto to trading, to mitigate the impact of Covid-related stress.
The financial parameters relating to leverage, liquidity and debt serviceability are based on the recommendations of the Expert Committee, headed by former ICICI Bank chief KV Kamath, on a ‘Resolution Framework for Covid-related stress’.
In August, the RBI had permitted one-time restructuring of corporate advances and personal loans amid concerns of a spike in bank NPAs due to the Covid-19 pandemic.
Besides auto and trading, the major sectors for which the parameters (ceilings or floors, as the case may be) have been prescribed include aviation, construction, consumer durables/FMCG, corporate retail outlets, gems and jewellery, hotel, restaurants, tourism, power, and real estate.
The five financial parameters are: Total Outside Liabilities (TOL)/Adjusted Tangible Net Worth (ATNW); Total Debt/EBITDA; Current Ratio; Debt Service Coverage Ratio (DSCR); and Average DSCR.
Under the RBI’s framework, only borrowers classified as standard and with arrears of less than 30 days as on March 1, 2020 are eligible for resolution.
Other sectors
Where sector-specific thresholds have not been specified, lending institutions shall make their own internal assessments regarding TOL/ATNW; and Total Debt/EBITDA.
However, the current ratio and the DSCR in all cases shall be 1.0 and above, and ADSCR shall be 1.2 and above.
The central bank said lending institutions are free to consider other financial parameters as well while finalising the resolution plan apart from the mandatory five key ratios and the sector-specific thresholds prescribed.
Graded approach
Given the varying impact of the pandemic on sectors/entities, the RBI said the lending institutions may, at their discretion, adopt a graded approach depending on the severity of the impact on the borrowers, while preparing or implementing the resolution plan. Such an approach may also entail classification of the impact on the borrowers into mild, moderate or severe, as recommended by the Committee.
India Ratings has estimated that around 7.7 per cent (₹8.4-lakh crore) of the total bank credit as at end-March 2020 from corporate and non-corporate segments could get restructured under the Covid resolution framework.
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