The Reserve Bank of India(RBI) appointed expert committee on a resolution framework for bank loans stressed on account of the pandemic has outlined parameters to deal with 26 sectors effected by Covid-19.
The findings of the committee have been accepted by the RBI, which issued a circular detailing the financial parameters to be followed by lending institutions.
The committee identified a few mandatory financial ratios, but left it to banks to work out their own extra criteria.
The mandatory ratios that should be used for any restructuring are total outstanding liabilities/adjusted tangible net worth, total debt/Ebitda (earnings before interest, depreciation, tax, and amortisation), the current ratio, the debt service coverage ratio, and the average debt service coverage ratio.
The committee recommended financial ratios for 26 sectors for the purpose of recommending financial parameters to be factored in the resolution plan.
1 Power; Construction; Iron & Steel Manufacturing ; Roads; Real Estate; Trading-Wholesale; Textiles; Chemicals; Consumer Durables/FMCG; Non-ferrous Metals; Pharmaceuticals Manufacturing; Logistics; Gems & Jewellery; Cement; Auto Components;; Corporate Retail Outlets ; Hotel, Restaurants and Tourism; Mining; Plastic Products Manufacturing; Automobile Manufacturing; Auto Dealership; Aviation; Sugar; Port & Port services; Shipping Building Materials.
Signing inter-creditor pact will be mandatory to invoke debt resolution. To assess inter-creditor pact compliance is needed in supervisory review. Lenders are free to consider other financial parameters in addition to five mandatory ones, the report stated.
The panel also recommended that debt service coverage ratio should be 1 and above in all eligible cases. Banks should consider pre-covid financial state of company and covid impact to finalise recast plan.
However, only those borrower accounts shall be eligible for resolution which were classified as standard, but not in default for more than 30 days with any lending institution as on March 1, 2020.