Focus: GS-III Indian Economy
Why in news?
- The Reserve Bank of India set up a five-member expert committee headed by K V Kamath which recently came out with recommendations on the financial parameters required for a one-time loan restructuring window for corporate borrowers under stress due to the pandemic.
- It sets the stage for the banking sector’s biggest ever loan restructuring programme.
- The committee was tasked to recommend the sector-specific benchmark ranges for financial parameters to be factored into each resolution plan for borrowers with an aggregate exposure of Rs 1,500 crore or above at the time of invocation.
How serious is the debt problem?
- The Kamath committee noted that corporate sector debt worth Rs 15.52 lakh crore has come under stress after Covid-19 hit India, while another Rs 22.20 lakh crore was already under stress before the pandemic.
- This effectively means Rs 37.72 crore (72% of the banking sector debt to industry) remains under stress. This is almost 37% of the total non-food bank credit.
What are the key proposals?
- The RBI has broadly accepted the committee’s recommendation to take into account five financial ratios and sector-specific thresholds for each ratio in respect of 26 sectors while finalising the resolution plans.
- These ratios are: total outside liabilities to adjusted tangible net worth; total debt to earnings before interest, taxes, depreciation, and amortisation (EBIDTA); debt service coverage ratio (DSCR); current ratio; and average debt service coverage ratio (ADSCR).
- The RBI has now finalised sector-specific ceilings for each of these ratios that should be considered by lending institutions.
- The parameters have been specified depending on severity of the impact of the pandemic. The hardest-hit sector real estate, for instance, has been provided the highest permissible debt-to-EBIDTA ratio for a resolution plan.
How will these proposals be implemented?
- Banks will present their board-approved resolution policies taking into account the RBI final guidelines.
- Broad guidelines will also be put in place for restructuring of retail loans.
- For implementing resolution plans, signing of an inter-creditor agreement (ICA) is mandatory in all cases involving multiple lending institutions.
- The process has to be approved by lenders with 75% in value and 60% in numbers.
Which are the sectors affected?
- Pharma, telecom, IT, FMCG, brokerage services, agri and food processing, sugar and fertiliser are among the sectors least impacted by the pandemic.
- Tourism, hotels, restaurants, construction, real estate, aviation, shipping, media and entertainment are among the sectors most impacted.
- Other major industries impacted, and to which banks have sizeable exposure, include engineering, petroleum & coal production, ports, cements and chemicals.
Will the loan recast lift the economy?
- Restructuring announcements in the past (FY08-11 and FY13-19) had raised concerns about the efficacy of the restructuring mechanism, as most of the restructured assets eventually slipped into NPAs.
- While the RBI has put into place several guardrails this time in the form of defined timelines and external vetting, success of the plan will still largely depend upon a significant revival in the economy.
- The biggest impact will be that banks will be able to check the rise in NPAs to a great extent.
How were earlier schemes misused by banks and corporates?
- The RBI discontinued the corporate debt restructuring (CDR) scheme in 2015.
- Big Corporates approached CDR cells of banks to get their loans recast, some of them managing this more than once.
- Some of those who misused CDR are now in the bankruptcy court.
- The RBI later introduced three more loan recast schemes which either remained largely on paper or were abused by borrowers.
- The Insolvency and Bankruptcy Code finally kicked off and the RBI announced a stringent loan resolution process.
-Source: Indian Express