KV Kamath Committee Shares Sector Wise Loan Restructuring Guidelines for Lenders
The much awaited report on ‘Resolution Framework for Covid-19 related Stress,’ has been submitted by K.V. Kamath committee. The 5 member RBI appointed panel highlighted 5 financial parameters for lenders to assess financial health of various sectors.
These parameters include:
1. Total Outside Liability / Adjusted Tangible Net Worth (TOL / Adjusted TNW)
2. Total Debt / EBIDTA
3. Current Ratio
4. Debt Service Coverage Ratio (DSCR)
5. Average Debt Service Coverage Ratio (ADSCR)
TOL / Adjusted TNW
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.
Total Debt / EBIDTA
Addition of short term and long-term debt divided by addition of profit before tax, interest and finance charges along with depreciation and amortisation.
Current assets divided by current liabilities.
Debt Service Coverage Ratio (DSCR)
For the relevant year addition of net cash accruals along with interest and finance charges divided by addition of current portion of long term debt with interest and finance charges.
Average Debt Service Coverage Ratio (ADSCR)
Over the period of the loan addition of net cash accruals along with interest and finance charges divided by addition of current portion of long term debt with interest and finance charges.
The committee has identified 26 most affected sectors due to COVID 19 Pandemic; the real estate being, the one getting maximum leeway. The Committee said in its report that the pandemic Covid-19 has hurt even the best of companies.
According to Kamath Committee the list of 26 most affected sectors from COVID 19 include following industries:
Power, Construction, Iron & Steel Manufacturing, Roads, Real Estate, Trading-Wholesale, Textile, Chemicals, Consumer Durables/ FMCG, Non-ferrous Metals, Pharmaceuticals Manufacturing, Logistics, Gems & Jewellery, Cement, Auto Components, Hotel, Restaurants, Tourism, Mining, Plastic Products Manufacturing, Automobile Manufacturing, Auto Dealership, Aviation, Sugar, Port & Port services, Shipping, Building Materials, and Corporate Retail Outlets.
The committee has not prescribed any threshold for Current Ratio as it has “just in time inventory” business model for raw materials and parts. Besides the finished goods inventory is mainly funded by channel financing through dealers.
1. For Airline Industry, Targeted Current Ratio is set at 0.40 and above. This is because this industry runs on cash and carry model and thus there are almost nil debtors. The maximum of current liabilities are in the form of customer advance which is approximately 2 months of annual sales of Aviation Industry.
They also enjoy credit of 6-9 months from vendors, including cost of fuel.
2. Debt Service Coverage Ratio or DSCR cannot be assessed. For, largely airline industry has adopted as a financing strategy of refinancing of debt.
The realty sector received highest flexibility and no parameters are defined. The decision to issue recasting loan will be based on the basis of project level.
Here Average Debt Service Coverage Ratio (ADSCR) is set at 1.10.
Trading – Wholesale:
Debt Service Coverage Ratio or DSCR/ Avg. DSCR is not ascertainable.
RBI Accepts the recommendations
The RBI has accepted the committee’s suggestion and allowed banks and NBFCs to adopt a graded approach, as per the disruption for implementing a resolution plan.
It further noted that the impact is pervasive but varies as mild, moderate and severe across the universe. Thus it suggested graded relief basis the financial disruption to the respective sector. The disruption on these sectors will be assessed based on these factors.
The RBI has also added the lenders can use other financial parameters as well while drafting the final restructuring resolution.
Also, RBI Governor ShaktiKanta Das has said that these recommendations are applicable for commercial loans while banks can decide modalities for restructuring of retail loans like personal loans, education loans and home loans based on approval from their respective boards. The timelines for both commercial as well as personal loans remain the same.
Highlights of RBI’s Resolution Framework, August 6, 2020
Eligibility for restructuring:
The restructuring option is offered to only those borrowers who are financially stressed due to Covid-19.
Besides their accounts should be “standard” i.e. having arrears less than 30 days as of March 1, 2020.
Invocation Date and implementation:
The lenders and borrowers are categorically informed by the RBI that the invocation for restructuring should be made by December 31, 2020. No request should be consider post this threshold.
The banks have to ensure that recasting of loans is implemented within 180 days of the invocation.
The overall tenor of the loan can be extended by maximum of 2 years. The lender may or may not offer moratorium, but the residual tenor should not be more than 2 years.
If the Moratorium is extended, it should come in force immediately.
The asset classification should be maintained standard and not degraded due to restructuring.
For aggregate exposures of more than Rs. 100 crores, an Independent Credit Evaluation (ICE) needs to be obtained from any one RBI’ authorised Credit Rating Agency
The above guidelines apply to restructuring, regularization, change in ownership or any other change in the loan account.
Any default will be triggered after a Review Period of 30 days.
The default will downgrade the asset classification to NPA from the date of implementation of recast of account.