Kamath panel’s recommendations on rejigging big ticket debt show the way for banks

The KV Kamath committee, set up by the RBI a month ago, to look into the restructuring needs of large borrowers hit by Covid has done well to identify 26 vulnerable sectors and, what’s more, the specific financial frailties of each. The panel was set up to deal with “accounts where the aggregate exposure of the lending institutions at the time of invocation of the resolution process is ₹1,500 crore and above”. The sectors identified cover much of the manufacturing and infrastructure universe, besides retail outlets, hotels and tourism. The panel, by spelling out sector-wise thresholds with respect to EBITDA, debt service coverage, current assets and liabilities, total outside liability vis-a-vis adjusted tangible net worth, has spelt out clear restructuring guidelines for banks, in effect ensuring that historical errors with respect to corporate debt restructuring do not recur. Restructuring has seen many avatars over the last decade or so, be it 5/25 (scheme for infrastructure assets) and S4A, which did not meet with much success. Now, the specific crisis arising out of Covid necessitated a response for large players, supplementing earlier efforts to boost the MSME sector as well as units where the aggregate exposure exceeded ₹100 crore. While MSMEs have received liquidity and solvency packages since September 2019, the June 7, 2019, RBI circular addresses the ‘resolution plan’ modalities for units whose aggregate exposure is above ₹100 crore. Relief to the large units will ensure flow of working capital across the supply chain, spurring industrial recovery. A relaxed timetable on loan repayments will aid this process.

However, instead of a cast-iron framework for banks, the panel could have allowed for some flexibility in interpretation, both within a sector and over time, especially in a situation of exceptional uncertainty. Also, by limiting the restructuring exercise at present to two years, the panel may have taken a rather sanguine view of the economic recovery process. Some of these assumptions must be reviewed periodically, if the situation so demands. The panel leaves little room for banks to deploy their traditional, sector-based expertise.

The RBI should focus on higher provisioning, and in a graded manner, for restructured loans, while allowing banks to take some initiative on the lending side. An ongoing committee that can provide expertise to banks from time to time on loan restructuring can also be considered. Over time, a centrally conceived template for lending and restructuring will help enhance credit appraisal skills along the rank and file of the banking system. That said, the need for such a framework cannot be overstated in these times of crisis. It seeks to reconcile prudence with higher lending. It is for the banking sector to pick up the tab.

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