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.
- The RBI took a number of steps to give relief to companies affected by Covid-19 in its Monetary Policy Report.
- 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.