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From RBI web site, The Reserve Bank had, on August 7, 2020, announced the constitution of an Expert Committee under the chairmanship of Shri K.V. Kamath to make recommendations on the required financial parameters to be factored in the resolution plans under the ‘Resolution Framework for Covid19-related Stress’ along with sector-specific benchmark ranges for such parameters.

The Committee has since submitted its report to the Reserve Bank on September 4, 2020, which is being placed on the RBI website. The Committee has recommended financial parameters that, inter alia, include aspects related to leverage, liquidity, and debt serviceability. The Committee has recommended financial ratios for 26 sectors which could be factored by lending institutions while finalizing a resolution plan for a borrower.

The recommendations of the Committee have been broadly accepted by the Reserve Bank.

It is time to understand the sterling recommendations which have been accepted by RBI and steps taken for implementation. This epoch-making decision taken first time in our history is expected to support struggling genuine industries in various sectors affected by the most unpredictable pandemic in a revival mode.

The report consists of 16 pages with the following details:

Letter of Transmittal



Chapter- I, Introduction

Chapter-II, Approach, and Methodology Adopted

Chapter III, Recommendations on Sector-Specific Parameters

What are the terms of reference of the expert committee?

I have no option than refer to page 6 of the report, (reproduced):

Terms of Reference of the Expert Committee

1. To identify suitable financial parameters that should be factored into the assumptions underlying RP finalized by the lending institutions under the Resolution Framework. The parameters shall cover aspects related to leverage, liquidity, debt serviceability, et

2. To recommend sector-specific ranges for such financial parameters that will serve as boundary conditions for the RP.

3. To make any other recommendations relating to financial or non-financial conditions to be considered for the RP, within the contours of the framework announced by the Reserve Bank of India.

4. To undertake the process validations of RP submitted in respect of borrowers where the aggregate exposure of the lending institutions at the time of invocation of the resolution process is Rs. 1500 crore and above. The process validation shall entail verification of the RP in terms of their adherence to the conditions prescribed in the Resolution, without interfering with the commercial judgment exercised by the lenders

For me, a simple layman, it emphasizes that identify suitable financial parameters which would cover aspects related to leverage, liquidity, debt serviceability, etc., further recommend sector-specific ranges for such parameters that will serve as a boundary condition for Resolution Plan(RP) and other recommendations connected with suitable financial/non-financial parameters to help RP.

Now that the base has been covered for understanding the report, how has the report gone ahead in its process?

Approach and methodology adopted

The first and foremost task before the Committee was to identify the sectors where the impact of Covid-19 was visible. To have a better understanding of the above objective, the Expert Committee held several meetings with various stakeholders through the digital platform.

Thereafter, the committee recognized that:

“The Covid-19 pandemic has affected the best of companies.

  • These businesses were otherwise viable under the pre-COVID-19 scenario.
  • Impact is pervasive across several sectors but with varying severity – mild, moderate, and severe.”

The task before the Committee was to select the set of financial parameters where the threshold has to be recommended for each identified sector.

 The financial parameters inter alia should include aspects related to leverage, liquidity, debt serviceability, etc.

On the evaluation and analysis, the following parameters were selected based on their relevance while considering the RP:

  • Total Outside Liability / Adjusted Tangible Net Worth (TOL / Adjusted TNW)
  • Total Debt / EBIDTA
  • Current Ratio
  • Debt Service Coverage Ratio (DSCR)
  • Average Debt Service Coverage Ratio (ADSCR).

Let me be frank with you that you need to refer page 11 of the report for knowing the definition of key ratio, however talented one can be in accounting, finance, etc.

Based on the outstanding and the severity impact, the Committee selected the following sectors for the purpose of recommending financial parameters to be factored in the RP:

(This was one of the most challenging tasks of the committee but with the expert leadership of Mr. K.V. Kamath, a veteran banker with extensive national/ international exposure and outstanding credentials as a banker, it was done. The precise manner of formalization of the report speaks volumes for all members of the committee too.)

The daunting task ended with the following sectors:

1.  Power

 2. Construction

3. Iron & Steel Manufacturing

4. Roads

5. Real Estate

6. Trading-Wholesale

7. Textiles

8. Chemicals

9. Consumer Durables/FMCG

10. Non-ferrous Metals

11. Pharmaceuticals Manufacturing

12. Logistics

13. Gems & Jewelry

14. Cement

15. Auto Components

16. Hotel, Restaurants, Tourism

17. Mining

18. Plastic Products Manufacturing

19. Automobile Manufacturing

20. Auto Dealership

21. Aviation

22. Sugar

23. Port & Port services

24. Shipping

25. Building Materials

26. Corporate Retail Outlets

Though the committee indicated arriving at the above sectors after hectic parleys with all stakeholders for 11 internal deliberations and one extensive on August 26, 2020, with  Internal deliberations and Presentation by ICRA, CARE, Association of Power Producers, National Highways Builders Federation (NHBF), and CREDAI National, we may look at the sectors with some recent sudden collapse of the economy based on newspapers economic data from papers like Economic Times, Financial Express, etc.

  • Pharmaceutical sector for lack of raw materials from China and other places
  • The auto sector which collapsed due to a lack of purchase through the last month has shown some sale movements
  • Shipping and Aviation due to the recent pandemic slipped heavily and even now Aviation has not resumed internationally among nations.
  • Construction and building materials have been suffering on account of recent failure in thousands of construction projects and new ones not getting enough traction.
  • Hotels, tourism, and restaurants were restrained in action by lockdown and yet to be revived in full strength in various states.

Let us look at” Recommendations on Sector-Specific Parameters” by the Committee. The specific recommendation is very important for understanding the metrics.

“The sector-specific parameters may be considered as guidance for the preparation of RP for a borrower in the specified sector.

 The RP may be prepared based on the pre-COVID-19 operating and financial performance of the borrower and impact of Covid-19 on its operating and financial performance in Q1 and Q2FY21, to assess the cash-flows for FY21 / FY22 and subsequent years.

 In these financial projections, the threshold TOL/Adjusted TNW and Debt/ EBIDTA ratios should be met by FY23. The other three threshold ratios should be met for each year of the projections starting from FY22. The base case financial projections need to be prepared as part of RP.

The Committee has uniformly proposed thresholds for current ratio, DSCR, and ADSCR as in the table below in most of the sectors (exceptions flagged in the table). The borrowers eligible under the current Framework are Standard Accounts and as such, they may require some time to restore their position to pre-COVID-19 level.”

Page 14 contains 26 sectors, TOL / ATNW, Total Debt/ EBITDA, Current Ratio, Average DSCR, DSCR. You may refer page 14 of the report for a detailed understanding of recommendation under each head which stands accepted by RBI but some indication, in general, will enlighten us partially.

  • TOL / ATNW has been recommended to be equal to or less than mostly 3 and 4.50 but a few do find the place as 6, 7, and 10.
  • Total Debt/ EBITDA has been recommended to be equal to or less than mostly 4.50 and 6.0 but a few do find the place as 9, and 12.
  • The total Current Ratio has been recommended to be 1.00 or more.
  • Average DSCR has been recommended to be 1.20 or more.
  • DSCR has been recommended to be 1.00 or more.

However, the committee made specific recommendations for certain sectors that faced the maximum upheavals. Sector-wise with our observations at the end.

” Automobile Manufacturing: We are not prescribing any threshold for Current Ratio due to the “just in time inventory” business model for raw materials and parts, and finished goods inventory is funded by channel financing available from the dealers.”

  • Our observations: The policy of major car manufacturers hinges on just in time inventory method, which previously could work because of historic demand, and in some cases even advance money was received. It is difficult to say what would happen in view of the pandemic through the position has considerably improved due to August 2020 improved sale.
  • “Aviation: 1. Targeted Current Ratio for Airline Industry is kept at 0.40 and above because of the following key reasons: • Cash and carry model for revenue purpose, thereby creating almost nil debtors and higher current liabilities in form of advance received from customers.
  • These advances are approximately 2 months of yearly sales of the airline industries. • The airline enjoys the credit of typically 6-9 months from vendors (including fuel payment).
  • DSCR is not ascertainable for the airline industry since most of the airline companies work on refinancing of debt as a financing strategy. As a consequence, Avg. DSCR is not ascertainable for the airline industry.” These expert observations need no further comments.
  • “Real Estate: Considering the typical nature of Real Estate projects, the parameters to be considered at the project level rather than at an entity level.”
  • Our observations: This sector even before the pandemic has been tottering due to the massive increase of incompletion of projects, declaration of may owners of projects after selling the projects failed to deliver on time and some of them declared absconders, and the cumulative effect of these developments reflected in poor progress. One has to totally agree with the expert committee directions to consider parameters at the project level.
  • “Roads: In the roads sector, the financing is a cash flow based and at SPV level where the level of debt is decided at the time of initial project appraisal. It may also be noted that the working capital cycle in this sector is negative. Accordingly, ratios like TOL / ATNW, Debt/EBITDA, and Current ratio may not be relevant at the time of restructuring in this sector. Since cash flows of several projects are by way of annuity payments, the threshold ADSCR has been kept at 1.10.”
  • Our observations: If there was one sector which totally collapsed due to pandemic, the reference goes to the road sector since inter-city, interstate, and in most cases, intracity movements have been banned due to the ever-increasing pandemic which ranks among the second-worst among all nations in our country, as per today’s Times of India reports. Full credit goes to the committee for its excellent observations and recommendations.

What will be the future course of actions by banks/borrowers or other stakeholders?

RBI issued a circular directing bank to act according to its circular dated 7th September 2020 RBI/2020-21/34 /DOR.No. BPBC/13/21.04.048/2020-21 which is reproduced below for information.

(Resolution Framework for COVID-19-related Stress – Financial Parameters)

Let us include the directions given in the above circular as under:

The banks are expected to follow strictly the instructions contained in the above letter and start implementing the RP plans, sector-wise, and also borrower wise.


The purpose of this article is to invite the attention of all stakeholders in finance, accounting, manufacturing, and banking to view the latest developments which are historic and totally binding on banks for implementation particularly after complete vetting of Kamath committee recommendations to RBI which have been totally accepted and the relevant circular issued by RBI on September 7, 2020. Never in the history of banking, a committee identified the sector, recommended the financial ratios opted and RBI totally implemented the recommendations. All involved are to be congratulated for this historic development.


Disclaimer: I just have discussed the recommendations of Kamath committee which are my personal views. Neither nor RBI is responsible for my views. Anyone can refer to RBI circulars for proper guidance and approach the professionals for legal assistance.

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