The Reserve Bank of India has released guidelines for the banks to follow during the restructuring of the covid19 loan exposures across 26 sectors. Restructuring benefits can be availed by those whose account was standard as on March 1, 2020 and defaults should not be over 30 days. In addition, banks will also have the track the record of the borrower, which will help them prepare a list of possible beneficiaries, and they can decide the eligibility norms and start implementing it once the final guidelines are out. For this, RBI has set up a five-member committee headed by K V Kamath, former chairman of ICICI Bank, which will make recommendations on the financial parameters required.
The committee has been tasked with working out the broad parameters for loan restructuring and vet if the process is being followed or not, without getting into specifics of the case. The committee will also undertake a process validation of resolution plans for accounts above a specified threshold.The circularwhich was recommended by the committee states that five financial metrics need to be taken into account while deciding on a recast plan: total outstanding liabilities/ adjusted tangible net worth, total debt/Ebitda, current ratio, debt service coverage ratio, and finally the average debt service coverage ratio. For each of these parameters, RBI has prescribed either a ceiling or a floor.The Reserve Bank has said the current ratio and DSCR (debt service coverage ratio) in all cases shall be 1.0 and above, and adjusted SCR shall be 1.2 and above. Lenders are expected to ensure that the ratio of the total outside liabilities to the adjusted tangible networth (TOL/ATNW) is complied with when the recast is finally implemented.
The scheme will be of help to banks to check the rise in non-performing assets (NPAs). According to rating agency CRISIL, 75 percent of companies availing of moratorium are sub-investment grade. A section of borrowers who have gone for a moratorium are likely to apply for the new scheme and banks won’t face much problems in working out individual resolution plans as they will have to tackle only the pandemic-hit stressed borrowers.To cut the impact of expected loan losses, banks also need to make a 10 percent provision against such accounts under resolution. For banks not willing to be part of the ICA, a penal provision of 20 percent has also been specified.For personal loans, banks can invoke the resolution plan till December 31, 2020, and can implement this within 90 days thereafter. The lending institutions arehowever, encouraged to strive for early invocation in eligible cases too.RBI has said that MSMEs (micro, small and medium enterprises) will be eligible under the existing framework, provided their accounts were classified as standard as on March 1, 2020 and this restructuring will have to be implemented by March 31, 2021.
The sector-specific parameters may be considered as guidance for preparation of resolution plan and lenders may adopt a graded approach classifying the impact on borrowers as mild, moderate and severe. “Considering the large volume and the fact that only standard assets are eligible under the proposed scheme, a segmented approach of bucketing these accounts under mild, moderate and severe stress, may ensure quick turnaround,” the report said. Severe stress cases would require comprehensive restructuring and the exceptions to the thresholds were made for five sectors that includes auto manufacturing, aviation, real estate, roads and wholesale trading. Also, any default by the borrower with any of the signatories to the ICA during the monitoring period shall trigger a review period of 30 days.If the borrower is in default with any the signatories to the ICA at the end of the review period, then the asset classification of the borrower with all lending institutions, including those who did not sign the ICA, shall be downgraded to non-performing asset (NPA) from the date of implementation of the plan or the date from which the borrower had been classified as NPA before implementation of the plan, whichever is earlier.