I am getting lot of queries regarding corporate debt restructuring under COVID as per RBI circular dated 06-08-2020. I decided to submit my views on the implementation of these guidelines for the eligible borrowers to address various issues:-
A) Objective & Background
1. The economic fallout on account of the Covid-19 pandemic has led to significant financial stress for borrowers.
2. The resultant stress can potentially impact the long-term viability of many firms.
3. Such wide spread impact could impair the entire recovery process, posing significant financial stability risks.
4. Considering the above, with the intent to facilitate revival of real sector activities and mitigate the impact on the ultimate borrowers, it has been decided to provide a window under the Prudential Framework to enable the lenders to implement a resolution plan in respect of eligible corporate exposures without change in ownership as per conditions and eligibility criteria.
5. Generally account turned to NPA on restructuring of advances except in the case of change in ownership as per prudential framework. In case of resolution under this framework, the account will not downgrade to NPA subject to fulfillment of certain conditions. Borrowers’ accounts which may have slipped into NPA between invocation and implementation may be upgraded as Standard, as on the date of implementation of the plan.
B) Eligible Borrowers and applicable conditions
1) The reference date for the outstanding amount of debt that may be considered for resolution shall be March 1, 2020.
2) Only those borrower accounts shall be eligible for resolution under this framework which were classified as standard, but not in default for more than 30 days with any lending institution as on March 1, 2020.
3) The accounts should continue to remain standard till the date of invocation.
4) Resolution under this framework may be invoked not later than December 31, 2020 and must be implemented within 180 days from the date of invocation.
5) The date of invocation shall be the date on which both the borrower and lending institution have agreed to proceed with a resolution plan under this framework.
C) Parameters of Restructuring as per Expert Committee:-
The Expert Committee has guided mainly below mentioned 5 parameters for 26 industries.
A)Ratios to be complied with from FY-2022
1) Current Ratio
2) Average Debt Service Coverage Ratio (ADSCR)
3) Debt Service Coverage Ratio (DSCR)
4) TOL/*Adjusted TNW
*Tangible net worth net of the investments and loans in the group and outside entities.
In respect of other industries all parameters to be guided by internal policies of the respective banks subject to current ratio and ADSCR must be 1 & above and 1.2 & above respectively.
D) Feature of Resolution Plan
1) The resolution plan may involve any action (regularization, restructuring, and others) as provided in “Prudential Framework”, except compromise settlements which shall continue to be governed by the provisions of the Prudential Framework.
2) WCTL. FITL, repayment extension, moratorium and additional finance may be explored under the framework. Additional finance may be sanctioned before implementation of plan to meet the interim liquidity problem of the borrower.
3) The resolution plan may also include sanctioning of additional credit facilities to address the financial stress of the borrower on account of Covid19 even if there is no renegotiation of existing debt.
4) The lending institutions may allow extension of the residual tenor of the loan, with or without payment moratorium, by a period not more than two years. The moratorium period, if granted, shall come into force immediately upon implementation of the resolution plan.
5) Conversion of a portion of the debt into equity or other marketable, non-convertible debt securities issued by the borrower.
6) Resolution plans in respect of accounts where the aggregate exposure of the lending institutions at the time of invocation of the resolution process is Rs. 100 crore and above, shall require an independent credit evaluation (ICE) by any one credit rating agency (CRA).
7) Viability of the project to be ensured as per the internal guidelines of the respective banks/FIs generally by TEV study.
8) All proceeds shall be routed through an escrow account maintained with one of the lending institutions. To ensure that the above operations are carried out smoothly, lending institutions shall enter into a formal agreement with the escrow manager.
E) Significant Papers for Making Resolution Plan
1) Last three years Audited Balance Sheet.
2) Business Model of the company before and after COVID-19.
3) Geographical assessment of sale and purchase
4) Sanction/Renewal letter of all facilities sanctioned to the borrower.
5) Outstanding position of all limits fund based and non-based limits.
6) Provisional Balance Sheet as on date.
7) Stock Statement s of last one year.
8) Last CMA data submitted and CMA data to be prepared by the management with assumptions taken for projections.
9) Copy of last stock audit report.
10) Past TEV study and project reports, if any.
11) Plan of expansion of business, if any.
12) Status of project which are under implementation and COD not yet achieved.
13)Other documents/papers on case to case basis.