Resolution Plan by RBI for Covid-19 Stressed Assets

• 08 Sep 2020

Why in News

The Re­serve Bank of India (RBI) has specified five fi­nan­cial ra­tios and sec­tor-spe­cific thresh­olds for res­o­lu­tion of Covid-19 re­lated stressed as­sets in 26 sec­tors.

Key Points

• Recommended by: This resolution plan is based on the recommendations of the K.V. Ka­math com­mit­tee.
• Financial Ratios: The key fi­nan­cial ratios to be considered in the restructuring of loans impacted by the Covid-19 pandemic are:
  
  • Total Outside Liability to Adjusted Tangible Net Worth Ratio : This ratio is arrived at by addition of long-term debt, short term debt, current liabilities and provisions and deferred tax liability divided by tangible net worth net of the investments and loans. It indicates a company's financial leverage over the total net worth of the company.
  • To­tal debt to EBIDTA ratio: It is total debt divided by Earnings Before Interest, Depreciation, Taxes and Amortisation (EBIDTA). This ratio indicates the cash position of a company to pay back its debt. Higher ratio means the company has more leverage.
  • Cur­rent ra­tio: Cur­rent as­sets divided by cur­rent li­a­bil­i­ties. Current ratio indicates the company's ability to pay short term debt and other liabilities which are due within a year's time.
  • Debt Ser­vice Cov­er­age Ra­tio: It is the available cash to pay current debt.
  • Av­er­age Debt Ser­vice Cov­er­age Ra­tio.
• Sectors: The 26 sec­tors spec­i­fied by the RBI in­clude au­to­mo­biles, power, tourism, ce­ment, chem­i­cals, gems and jew­ellery, lo­gis­tics, min­ing, man­u­fac­tur­ing, real es­tate, and ship­ping among oth­ers.
• Eligibility: The resolution under this framework is applicable only to those borrowers who have been impacted on account of Covid.
  
  • Only those borrowers which were classified as standard and with arrears less than 30 days as at March 1, 2020 are eligible under the Framework.
  • The res­o­lu­tion plans shall take into ac­count the pre-Covid-19 op­er­at­ing and fi­nan­cial per­for­mance of the bor­rower and im­pact of Covid-19 on its op­er­at­ing and fi­nan­cial per­for­mance.
• Graded Approach: The lend­ing in­sti­tu­tions may, at their dis­cre­tion, adopt a graded ap­proach de­pend­ing on the sever­ity of the im­pact on bor­row­ers while im­ple­ment­ing the res­o­lu­tion plan.
  
  • The banks can classify the accounts into mild, moderate and severe as recommended by the committee.
  • Simplified restructuring may be done for mild and moderate stress. Severe stress cases would require comprehensive restructuring.
• Background:
  
  • The RBI took a number of steps to give relief to companies affected by Covid-19 in its Monetary Policy Report.
    
    • It permitted lenders a one-time restructuring of loans without classifying these as Non-Performing Assets.
  • It allowed lenders to grant a loan moratorium for three months on Equated Monthly instalments (EMIs) falling due between March 1 and May 31, 2020. Later, it extended this for another three months until August 31.
• According to a report by India Ratings and Research, a high proportion of debt from the real estate, airlines, hotels, and other sectors had been restructured, the largest contribution had been from infrastructure, power, and construction.
  
  • Banks are likely to restructure up to Rs. 8.4 lakh crore of loans, or 7.7% of the overall system's credit.
  • The restructuring quantum from the corporate sector in FY21 could range between 3% and 5.8% of the banking credit, amounting to Rs 3.3-6.3 lakh Crores.
  • At least Rs. 210,000 crore (1.9% of banking credit) of non-corporate loans is likely to undergo restructuring after the announcement, which would have otherwise slipped into the Non-Performing Asset category.
  • India Ratings and Research is a credit rating agency that provides credit opinions regarding India's credit markets.

Way Forward

• The loan restructuring must be a temporary step as continuing it for long may lead to an inflation surge, currency crisis, and financial instability due to accumulation of bad loans. It is important that post-Covid-19, regulatory measures are rolled out in a very careful and orderly manner and the financial sector returns to normal functioning without relying on the regulatory relaxations as the new norm.