Resolution Framework for COVID-19 related stress – Financial Parameters

The Reserve Bank of India on September 7, 2020, released the K V Kamath-led Committee report, which had recommended financial parameters to be factored within the resolution plans under the ‘Resolution Framework for Covid19-related Stress’ alongside sector-specific benchmark ranges for such parameters.

The committee has recommended financial ratios for 26 sectors which might be factored by lending institutions while finalizing a resolution plan for a borrower. The financial aspects include those associated with leverage, liquidity, debt serviceability.

The RBI had formed a five-member committee under the chairmanship of Kamath to form recommendations on the financial parameters to be considered for the one-time restructuring of loans impacted by the COVID 19 pandemic.

Other members of the committee are former state bank of India executive Diwakar Gupta, current Canara Bank chairman TN Manoharan, consultant Ashvin Parekh and Indian Banks' Association (IBA) CEO Sunil Mehta who was also a secretary to the committee. The recommendations of the Committee are broadly accepted by the reserve bank.

Accordingly, a follow-up circular to the Resolution Framework guidelines announced on August 6, 2020, has been issued today by the Federal Reserve Bank specifying five specific financial ratios and therefore the sector-specific thresholds for every ratio in respect of 26 sectors to be taken under consideration while finalising the resolution plans, the central bank said during a statement.

In respect of other sectors where certain ratios haven't been specified, the lenders shall make their own assessment keeping in sight the contours of the circular dated August 6, 2020, and therefore the follow-up circular issued today, the circular added.

The committee panel recommended lenders to mandatorily consider total outstanding liabilities/adjusted tangible net worth, total debt/EBITDA, Current Ratio, Debt Service Coverage Ratio, and average debt service coverage ratio.

Signing an intercreditor pact is going to be mandatory to invoke debt resolution. To assess inter-creditor pact compliance is required in the supervisory review. Lenders are liberal to consider other financial parameters additionally to 5 mandatory ones, the report stated.

The panel also recommended that the debt service coverage ratio should be 1 and above altogether eligible cases. Banks should consider the pre-COVID financial state of the company and COVID impact to finalise the recast plan. However, only those borrower accounts shall be eligible for a resolution which were classified as standard, but not in default for quite 30 days with any financial institution as on March 1, 2020. consistent with RBI, the resolution framework could also be invoked not later than December 31, 2020, and therefore the plan must be implemented within 180 days from the date of invocation. Moreover, banks may restructure loans of quite ₹10 lakh crore largely attributed to 5-6 critical sectors, including aviation, commercial land and hospitality, that are severely hit by the Covid-19 outbreak, consistent with bankers. minister of finance Nirmala Sitharaman last week asked banks and NBFCs to roll out a one-time loan restructuring scheme for Covid-19 related stress by 15 September 2020.

The said circular can be accessed from here.

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