RBI releases new loan recast plan, relief for 26 sectors

The Reserve Bank of India on September 7, 2020 released guidelines for banks for resolution of COVID-19-related stressed assets in 26 sectors including aviation, tourism and auto components.

The apex bank specified five financial ratios and sector-specific thresholds in a circular issued for resolution of the stressed assets. The resolution plan is based on the recommendations of the KV Kamath Committee, which submitted its report on September 4, 2020.

RBI has identified 25 sectors that require urgent resolution of the stressed assets including automobiles, tourism, real estate, logistics, shipping, power, gems and jewellery, mining, chemicals, cement and manufacturing.

According to RBI, the five financial metrics that have to be taken into account while deciding on a recast plan include: 

1. Total outstanding liabilities/ adjusted tangible net worth
2. Total debt/Ebitda
3. Current ratio
4. Debt service coverage ratio
5. Average debt service coverage ratio

Key Highlights 

• The Reserve Bank stated that each of these specified financial ratios are intended to be floors or ceilings, as the case may be.

• RBI has said the current ratio and debt service coverage ratio in all cases shall be 1.0 and above and adjusted SCR shall be 1.2 and above.

• The lenders are expected to ensure that the ratio of the total outside liabilities to the adjusted tangible net worth (TOL/ATNW) is complied with when the recast is implemented.

• The RBI also stressed that the ratio will need to be maintained, in all cases, as per the plan by March 31, 2022, and on an ongoing basis thereafter. 

• However, in cases where there is equity infusion, the ratio may be suitably phased-in over the period.

• All other key ratios shall have to be maintained as per the resolution plan by March 31, 2022 and on an ongoing basis thereafter. 

Other Details 

The bank stated that the resolution plans must 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 at the time of finalizing the resolution plan, to assess the cash flows in subsequent years, while stipulating appropriate ratios in each case. 

The RBI further, while recognising the differential impact of the COVID-19 pandemic on various sectors/entities, said that the lending institutions may, at their discretion, adopt a graded approach depending on the severity of the impact of the outbreak and subsequent lockdown on the borrowers, while preparing or implementing the resolution plan.

Background

The KV Kamath Committee has set 180 days to implement the loan recast plan and has made an inter-creditor agreement (ICA) mandatory. According to the panel, the tenure of a loan may be extended by a maximum of two years, with or without a moratorium.

Overall, the loan resolution process shall be treated as invoked once lenders representing 75 percent by value and 60 percent by number agree to invoke the same.