Key FAQs on K V Kamath Committee’s recommendation to RBI’s OTR Scheme

Key FAQs on K V Kamath Committee’s recommendation to RBI’s OTR Scheme

Introduction:

Given the immense loss of income to organizations and individuals in the wake of the COVID-19 pandemic, we are all aware that the Reserve Bank of India has decided to permit a one-time restructuring of loans without classifying these as non-performing assets, amid the ongoing Covid crisis which is hitting everyone hard. You can find the key features and salient modalities of scheme in “(earlier blog link……)”

Moving ahead with the initiative, RBI had set up an Expert Committee with Shri K. V. Kamath as the Chairperson, as envisaged in the earlier circular. This much awaited report is out as the committee has laid down its recommendations regarding conditions to be considered for resolution plan within contours of the RBI framework.

 

Key features:

  • The Committee recommendations are applicable for accounts other than those covered by Part A of the earlier circular i.e., personal loans covering loans and borrowers over Rs 25 crore.

 

  • It states that the objective of this framework is to resolve only those loans suffering from Covid-related stress and not those that were already stressed before Covid.

 

  • Given the differential impact of the pandemic on various sectors/entities, the lending institutions may, at their discretion, adopt a graded approach depending on the severity of the impact on the borrowers, while preparing or implementing the resolution plan.

 

  • Such graded approach may also entail classification of the impact on the borrowers into mild, moderate and severe.

 

  • To complete this task, simplified restructuring for mild and moderate stress may be prescribed. Severe stress cases would require comprehensive restructuring.
  1. What are the financial parameters considered mandatorily by lenders while finalizing Resolution Plan (RP)?

RBI accepted the recommended 5 financial ratios that cover the aspects related to leverage, liquidity and debt serviceability.

 

Key ratios

Explanation

1

Total Outside Liabilities / Adjusted Tangible Net Worth (TOL/ATNW)

Long term debt + Short term debt + Current liabilities + provisions (including deferred tax liability)

Tangible Networth (Net of investments and loans in the group and outside entities.)

2

Total Debt / EBITDA

Long term debt + Short term debt

EBITDA

3

Current Ratio

Current Assets

Current Liabilities

4

Debt Service Coverage Ratio (DSCR)

Net cash accruals + Interest + Finance charges

Current portion of long term debt + Interest + Finance charges

5

Average Debt Service Coverage Ratio (ADSCR)

Net cash accruals + Interest + Finance charges

Current portion of long term debt + Interest + Finance charges

  • Lending institutions are free to consider other financial parameters as well while finalizing the resolution assumptions in respect of eligible borrowers apart from the above mandatory key ratios.
  • The above requirements are applicable even in cases when there is only one lending institution with exposure to an eligible borrower.

2. What are the listed sectors for which thresholds for each of the key ratios are specified?

 

The committee has identified 26 sectors based on the outstanding and the severity impact, for which sector specific thresholds are specified.

S.No

Sector

S.No

Sector

1

Power

14

Cement

2

Construction

15

Auto Components

3

Iron & Steel Manufacturing

16

Hotel, Restaurants, Tourism

4

Roads

17

Mining

5

Real Estate

18

Plastic Products Manufacturing

6

Trading-Wholesale

19

Automobile Manufacturing

7

Textiles

20

Auto Dealership

8

Chemicals

21

Aviation

9

Consumer Durables/FMCG

22

Sugar

10

Non-ferrous Metals

23

Port & Port services

11

Pharmaceuticals Manufacturing

24

Shipping

12

Logistics

25

Building Materials

13

Gems & Jewellery

26

Corporate Retail Outlets

Ratios prescribed are intended as floors or ceilings, as the case may be.

Sectors

TOL / ATNW

Total Debt/ EBITDA

Current Ratio

Average DSCR

DSCR

Auto Components

<= 4.50

<= 4.50

>= 1.00

>= 1.20

>= 1.00

Auto Dealership

<=4.00

<=5.00

>=1.00

>=1.20

>=1.00

Automobile Manufacturing

<= 4.00

<= 4.00

NA

>= 1.20

>= 1.00

Aviation

<= 6.00

<= 5.50

>= 0.40

NA

NA

Building Materials – Tiles

<=4.00

<=4.00

>=1.00

>=1.20

>=1.00

Cement

<=3.00

<=4.00

>=1.00

>=1.20

>=1.00

Chemicals

<=3.00

<=4.00

>=1.00

>=1.20

>=1.00

Construction

<=4.00

<=4.75

>=1.00

>=1.20

>=1.00

Consumer Durables / FMCG

<=3.00

<=4.00

>=1.00

>=1.20

>=1.00

Corporate Retails Outlets

<=4.50

<=5.00

>=1.00

>=1.20

>=1.00

Gems & Jewellery

<=3.50

<=5.00

>=1.00

>=1.20

>=1.00

Hotel, Restaurants, Tourism

<=4.00

<=5.00

>= 1.00

>=1.20

>=1.00

Iron & Steel Manufacturing

<=3.00

<=5.30

>=1.00

>=1.20

>=1.00

Logistics

<=3.00

<=5.00

>=1.00

>=1.20

>=1.00

Mining

<=3.00

<=4.50

>=1.00

>=1.20

>=1.00

Non Ferrous Metals

<=3.00

<=4.50

>=1.00

>=1.20

>=1.00

Pharmaceuticals Manufacturing

<=3.50

<=4.00

>=1.00

>=1.20

>=1.00

Plastic Products Manufacturing

<=3.00

<=4.00

>=1.00

>=1.20

>=1.00

Port & Port Services

<=3.00

<=5.00

>=1.00

>=1.20

>=1.00

Power

 

 

 

 

 

– Generation

<=4.00

<=6.00

>=1.00

>=1.20

>=1.00

– Transmission

<=4.00

<=6.00

>=1.00

>=1.20

>=1.00

– Distribution

<=3.00

<=6.00

>=1.00

>=1.20

>=1.00

Real Estate

 

 

 

 

 

– Residential

<=7.00

<=9.00

>=1.00

>=1.20

>=1.00

– Commercial

<=10.00

<=12.00

>=1.00

>=1.20

>=1.00

Roads

NA

NA

NA

>=1.10

>=1.00

Shipping

<=3.00

<=5.50

>=1.00

>=1.20

>=1.00

Sugar

<=3.75

<=4.50

>=1.00

>=1.20

>=1.00

Textiles

<=3.50

<=5.50

>=1.00

>=1.20

>=1.00

Trading – Wholesale

<=4.00

<=6.00

>=1.00

Instead Interest Coverage Ratio > = 1.70

  • Sector specific parameters shall be considered as guidance for preparation of resolution plan for a borrower in the specified sector.
  • However, the pre-Covid-19 operating and financial performance of the borrower and impact of Covid-19 on its operating and financial performance is taken into account at the time of finalizing the resolution plan, to assess the cash flows in subsequent years, while stipulating appropriate ratios in each case.

4. What if my operations are in a sector other than the above listed sectors?

 

  • In respect of those sectors where the sector-specific thresholds have not been specified, lending institutions shall make their own internal assessments regarding TOL/ATNW and Total Debt/EBITDA.
  • However, the current ratio and DSCR in all cases shall be 1.0 and above, and ADSCR shall be 1.2 and above.

By when should I comply with the above specified thresholds?

  1. Lending institutions are expected to ensure compliance to TOL/ATNW agreed as per the resolution plan at the time of implementation itself.
  2. Nevertheless, in all cases, this ratio shall have to be maintained as per the resolution plan by March 31, 2022 and on an ongoing basis thereafter.
  3. However, wherever the resolution plan envisages equity infusion, the same may be suitably phased-in over this period.
  4. All other key ratios shall have to be maintained as per the resolution plan by March 31, 2022 and on an ongoing basis thereafter.
  5. How is the compliance of meeting the agreed ratios monitored?The compliance in regard to meeting the agreed ratios will be monitored as financial covenants on an ongoing basis, and during subsequent credit reviews.

 

  1. What if I don’t meet the agreed ratios?
  • Since compliance to TOL/ATNW is expected at the time of implementation itself, if this is not met i.e., over levered company, bankers may agree subject to an equity infusion plan wherein the ratio is met by 31st march 2022 as envisaged in the scheme.
  • With respect to other key ratios and TOL/ATNW post implementation, any breach not rectified within a reasonable period, in terms of the loan contract, will be considered as financial difficulty.
  1. What about the applicability of ICA and Escrow account?
  • ICA is mandatory requirement, wherever applicable.
  • Maintenance of an escrow account after implementation of a resolution plan, shall be applicable at the borrower-account level, i.e. the legal entities to which the lending institutions have exposure to, which could include a special purpose vehicle having a legal-entity status, set up for a project.
  • It is further clarified that signing of ICA is a mandatory requirement for all lending institutions in all cases involving multiple lending institutions.
  • The requirement of additional provisions if the ICA is not signed within 30 days of invocation does not substitute for the mandatory nature of ICA.
  • Compliance with this regulatory requirement shall be assessed for all lending institutions as part of the supervisory review.

How to decide whether to opt for the restructuring?

  • Before opting for restructuring, borrowers must study the long term impact on financials. Revalidate your business case with clear feasibility. Opting for debt is prudent when there is clear visibility of cash flows with stability in business. This restructuring is not an interest holiday but interest gets accrued to the loan or takes the form of another loan.
  • The main limitation of the restructuring is the tenor restriction of 2 years, in case of granting of moratorium under resolution plans. Further, the ratios prescribed under the financial parameters by the expert committee are required to be met by 2022 and on an ongoing basis thereafter.
  • In cases where cash flow visibility is unclear and feels that the business takes longer time to recover, it’s better to go for equity.
  • But if Borrower Company is confident of getting back to new normal within a year or two, then choose to restructure the debt and also, opting for restructuring will not leave an adverse impact on the credit history of the borrower going for restructuring.
  • Consider the restructuring as aid to improving the cashflow to the business and not a final solution to business challenges. The ability to generate better operating cashflows than before either through use of technology or utilizing all business resources to full capacity or pivot business model based on customer preferences will only ultimately provide the sustainability for the business. The capital structure during this time of change should support the business decisions and hence the one-time restructuring will be a rescue.
  • Hence availing restructuring along with pivoting the business will lead to long term success and sustenance.
  1. How to ensure structure is suiting the business?                                                               The possible ways of restructuring are
  • Rescheduling of repayments by a maximum period of two years with or without a payment moratorium.
    • Conversion of accrued interest in to another credit facility.
    • Granting of Moratorium based on an assessment of income streams of the borrower, subject to maximum of 2 years.
    • Modification of overall tenor of the loan.
    • Offering new loan facility.

The loan restructuring is a mutual contract between the lenders and the borrower. If the terms of the loan remain unconnected to the cash flows of the borrower business, the business may not be able to perform.

Hence forecast the business cash flows taking into effect the changes in customer preferences, analyze and identify the time required by business to restore its stability. Depending on the forecasted cash flow generation capacity and liquidity of the business, one can choose the suitable structure, negotiate the terms and tenor with the lender for a flexible structure, if necessary.

Conclusion:

 

While the one-time restructuring scheme is a great relief to manage the impact of pandemic, businesses’ primary objective of business growth with optimum capital structure (Debt/Equity mix) shall continue to be the guiding force to work out the modalities of scheme. Objective of restructuring is to ensure cash flow mismatch is addressed with flexible structures for 2 years, where businesses retain the control to change course both ways upon gaining more visibility of business trajectory.

A closing remark “You have to make the most of the chances that come your way. You have to strike while the iron is hot.”

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