RBI’s Kamath committee wants banks to tick all the boxes of restructuring

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The long-awaited recommendations of the Reserve Bank of India’s (RBI) expert committee on restructuring were broadly approved by analysts, but with some reservations.

The committee, led by KV Kamath, submitted its recommendations Monday evening that covered 26 sectors and set thresholds for five ratios that banks must monitor while implementing a resolution plan for stressed borrowers.

These ratios are the total of external liabilities over adjusted tangible net worth, debt to EBITDA (earnings before interest, taxes, depreciation and amortization), current ratio, debt service coverage ratio (DSCR) and Average DSCR. These ratios monitor the level of indebtedness of companies, their cash flow and whether they can regain their ability to repay their debt.

Depending on the sector, the committee has prescribed a floor or ceiling for each of these ratios that borrowers must reach within two years of the restructuring.

What emerges is that borrowers will have to meet the total external liabilities at adjusted tangible net worth when the restructuring is implemented, i.e. fiscal year 21. This means that the RBI doesn’t want banks to help over-leveraged businesses that might not be viable even after restructuring.

Thresholds for the rest of the ratios must be reached by FY22 and FY23.

ICICI Securities analysts called the recommendations broader than expected. “This would allow transparency in the restructuring between lenders, while focusing on the effectiveness of the resolution plan,” wrote those of Motilal Oswal Financial Services Ltd.

That said, some believe that while the goals set by the committee are reasonable, some troubled sectors that already have a high level of bad debt may still find it difficult. For example, airlines may struggle to meet thresholds and even companies in the hospitality industry may struggle. “Some of the thresholds are strict and in the case of the hardest hit sectors, recovery depends on how quickly demand returns. It’s anyone’s guess now, “said an analyst requesting anonymity.

Indeed, banks can set up restructuring plans for borrowers given the pervasive stress that the committee also recognized. But the ability of lenders to finally get their money back depends on how quickly demand recovers in the economy.

To that extent, banks with a large stack of stress provisions would be more liberal in restructuring. After all, there is not much distance between the 10% provisioning required for this one-time restructuring and the 20% required under the June circular.

In either case, restructuring would mean forgoing revenue for the banks.

It is obvious that the Kamath committee wants the banks to tick all the possible boxes before embarking on loan restructuring and wants the banks to back up to that extent. Given the achievements of the past, it is obvious that the regulator does not want to take risks this time around when it allows banks to restructure loans with special waivers due to the pandemic. The five financial ratios should take this into account.

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