Loan Restructuring Scheme For COVID-19 Hit Stressed Borrowers.

Synopsis :

COVID -19 left a destructive mark on the World Economy including India, so the Government of India along with the Ministry of Finance & Reserve Bank Of India announced several Stimulus Shots to revive the Indian economy, so the Governor of RBI , Sri Sakthikantha Das announce the formation of K V Kamath committee to announce measures to support the Industries at the time of financial crisis and economic turmoil, the committee gave the report to RBI On 4rth of September 2020 which has been accepted by RBI in total.

Main Article :

♦ Leverage

♦ Liquidity

♦ Debt Serviceability

On September 4rth 2020, the K V Kamath committee appointed by the RBI to look in to the stress of Corporates following the COVID-19 Pandemic came up with their recommendations, if you see the Vital parameters  of the Indian economy following COVID-19, Our economy was in pretty bad shape, down by 23.9% during the First Quarter of FY 2020-2021 and the Debt recast assumed significance with the aim of supporting the Corporates & Small businesses  to come out of stress. The committee noted that the stress resulted in varying degrees of Pain cutting across various sectors. The KV Kamath Committee along with Members  Ashwin Parekh, Divakar Gupta, CATN Manoharan, & Sunil Mehta recommended five financial ratios for the Stressed 26 sectors for lenders to consider while finalizing resolution plans.

The five ratios listed by the committee are

◊ Total Outside Liability/Adjusted Tangible Net Worth,

◊ Total Debt/EBITDA,

◊ Current Ratio of 1

◊ Debt Service Coverage Ratio of 1.2

◊ Average Debt Service Coverage Ratio.

Who is eligible for Debt Restructuring ?eligible for Debt Restructuring

If we analyze the sectors Severely Impacted by COVID 19, they can be briefly summarized as per the charts depicted below.

Severely Impacted

The sectors Less Impacted by the pandemic were.

Less Impacted

Now if you want to draw a comparison of Banks Stressed portfolio to the Industrial sector before Pre & Post Covid-19 Situations, then the situation is as per the below  Pie-Chart.

Banks Stressed Debt (Pre & Post Covid - 19)

Total Exposure Lakh Crs
Before Covid-19 22.2
After Covid-19 15.5
Grand Total 37.7

Industry wise Stress Post Covid-19 in the Banking Sector can be briefly summarized as per the below Chart.

Banking Sector

Technically Speaking a Current Ratio of 1 & Debt Service Coverage Ratio (DSCR) of 1.2 has the following internal meaning that is it means the cash flow of the borrowers needs to be more than what is required to service their Debt. Experts say as a result, not many companies will be eligible for loan restructuring and added to that you should have a credit rating of “RP4” which indicates “Investment Grade” Rating which will keep many companies out of the ambit of Debt restructuring criteria. Banks also have the option to offer Debt recast to a company which is not part of these 26 sectors, but should have a Board-approved plan for such cases.

How to go around with the proposed recommendations of the committee. The Debt should have been classified as Standard as on 01-03-2020. Implementation of resolution plan requires ICA (Inter Creditor Agreement) amongst all the multiple lenders, the resolution plan will be invoked before December 31, 2020 and will be implemented 180 days before the date of invocation. The process has to be approved by lenders* with 75% in value and 60% in numbers. Lenders signing ICA will have to make a 10% provision and non-signing lenders at 20%  (akin to Hair-cut like situation), the restructuring can be done  by extending the residual tenor of the Debt up to maximum of Two years (24 Months) with or without Moratorium and may include the option of converting Debt / Loan in to Equity. Any Default by the borrower with any of the lenders who have signed the ICA during the monitoring period would trigger a review period of 30 Days and if the borrower remains in default at the end of the period all lenders will downgrade the account as Non-Performing Assets (NPA)

*Lenders can be a consortium / Loan Syndicate / Lead Bank / Lead Financial Institution.

Ratios In Brief:

Current Ratio   = Current Assets / Current Liabilities > = 1

Debt Service Coverage Ratio=Net Operating Income /Annual Debt Service > =1.2

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