The Reserve Bank of India (RBI)- appointed expert committee on the resolution framework for Covid-19-related stress outlined the financial parameters to deal with 26 sectors under stress due to the coronavirus (Covid-19) pandemic, which the central bank released on Monday evening.

According to the much-awaited report, the Covid-19 pandemic impacted retail and wholesale trade, roads, textile and engineering, the hardest, while sectors that were already under stress, such as non-bank financial companies (NBFC), power, steel, real estate etc, piled up more misery due to the Covid-19 pandemic.

The committee essentially identified almost all major sectors including auto, real estate and airlines. The committee also found sectors such as agriculture, food, pharma and IT, among a few others, that remained mostly unaffected.

The committee, headed by former chief of New Development Bank K V Kamath, did not earmark the amount that would need restructuring, but gave their recommendations based on some financial parameters after discussing with stakeholders, rating agencies, and going through financial reports of companies as well as some RBI reports.

However, bankers who studied the Kamath-committee report after it was released, said roughly Rs 4-4.5 trillion of loans would need to be recast to alleviate the Covid-19 stress, even after taking into consideration economic recovery in the coming months.

The committee identified a few mandatory financial ratios, but also left it to the banks to work out their own extra parameters. The mandatory ratios that should be used for any restructuring are total outstanding liabilities/adjusted tangible networth, total debt/EBITDA, current ratio, debt service coverage ratio, and average debt service coverage ratio.

All banks had already started working on identifying stressed companies, and can now fine tune and filter the exercise further with the mandatory ratios.

However, experts say that not all companies, even if they are part of the same sector, can be evaluated based on a common parameter.

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Particularly, two points need closer attention, experts say. Banks are expected to ensure compliance with total outside liability / adjusted tangible net worth (TOL / Adjusted TNW) as agreed in line with the resolution plan at the time of implementation itself. This ratio is essentially the addition of long-term debt, short term debt, current liabilities and provisions along with deferred tax liability divided by tangible net worth, net of the investments and loans in the group and outside entities.

In all cases, this ratio has to be maintained in accordance with the resolution plan by March 31, 2022 and on an ongoing basis thereafter. However, wherever the resolution plan envisages equity infusion, the same may be suitably phased-in over this period. All other key ratios shall have to be maintained according to the resolution plan by March 31, 2022 and on an ongoing basis thereafter.

“The compliance in regard to meeting the agreed ratios must be monitored as financial covenants on an ongoing basis, and during subsequent credit reviews. Any such breach not rectified within a reasonable period, in terms of the loan contract, will be considered as financial difficulty,” a statement by the RBI said.

“Prescribing financial ratio with a one-size-fits-all approach, irrespective of geography and size of firm, is not a feasible approach that the RBI has adopted. Also, the RBI needs to keep in mind that each borrower is unique and when it doesn’t prescribe financial parameters for sanctioning loans, it doesn’t make sense to do so for understanding the viability of the borrowers,” Jyoti Prakash Gadia, managing director at Resurgent India said.

The committee agreed that while it took a few months to finalise a large restructuring proposal because of the host of compliances, time is of essence now. The Kamath committee submitted their report to the Reserve Bank of India (RBI) in 28 days of getting their mandate, on September 4.

The committee further suggested that in sectors where the 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 DSCR in all cases shall be 1.0 and above, and ADSCR shall be 1.2 and above.”

The ratios prescribed in the report are “floors or ceilings, as the case may be, but the resolution plans shall take into account the pre-Covid-19 operating and financial performance of the borrower,” as well as the impact of the pandemic on its operating and financial performance at the time of finalizing the resolution plan.

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