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Business News/ Industry / Banking/  RBI relief for companies that opted for debt recast
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RBI relief for companies that opted for debt recast

The RBI had set up a five-member panel on 7 August 2020 to recommend the eligibility parameters for restructuring stressed loans

RBI had set up a five-member panel under the chairmanship of former ICICI Bank chief executive K.V. Kamath on 7 August 2020 to recommend eligibility parameters for restructuring stressed loans.Premium
RBI had set up a five-member panel under the chairmanship of former ICICI Bank chief executive K.V. Kamath on 7 August 2020 to recommend eligibility parameters for restructuring stressed loans.

Covid-hit corporate borrowers whose loans were restructured under the first recast scheme can take another six months to achieve financial parameters laid down by the Reserve Bank of India (RBI), the central bank said on Friday.

For resolution plans under the RBI’s circular of 6 August 2020, borrowers were supposed to meet sector-specific thresholds in five financial parameters, four of which are related to the operational performance of the borrower.

The central bank had announced these measures after the first wave of covid-19 infections disrupted the income streams of borrowers and crimped their ability to repay debt.

According to estimates by rating agency ICRA Ltd, banks have implemented corporate debt recasts of about 70,000 crore under this scheme.

RBI governor Shaktikanta Das said on Friday, “Recognizing the adverse impact of the second wave of covid-19 and the resultant difficulties on revival of businesses and in meeting the operational parameters, it has been decided to defer the target date for meeting the specified thresholds in respect of the above four parameters to 1 October 2022."

The RBI had set up a five-member panel under the chairmanship of former ICICI Bank chief executive K.V. Kamath on 7 August 2020 to recommend the eligibility parameters for restructuring stressed loans.

Its recommendations were broadly accepted by the central bank, which notified that borrowers from 26 sectors would be eligible for debt recast.

In its report, the five-member committee had identified five financial parameters for gauging the health of the sectors under difficulty. These parameters are: total outside liabilities to adjusted tangible net worth, total debt to Ebitda (earnings before interest, taxes, depreciation and amortization), debt service coverage ratio (DSCR), current ratio and average debt service coverage ratio (ADSCR).

While relaxing the compliance deadline on four of the five parameters, the central bank, however, said that the ratio of total outside liabilities to adjusted total net worth, which reflects the revised capital structure or the debt-equity mix, was expected to be crystallized upfront as part of the resolution plan. Therefore, the date for achieving this parameter was kept unchanged at 31 March 2022.

Sector experts said the extension would allow some room to those companies whose loans have already been restructured under the central bank framework. Hit by the second wave of covid-19 that ravaged the economy in April and May, these companies have a bit longer to comply.

“As the earnings of the companies have been impacted because of the second wave, achieving financial parameters related to profitability could be a challenge in FY22," said Anil Gupta, vice-president and sector head (financial sector ratings), ICRA.

Accordingly, the deferral of some of the financial parameters related to profitability like ratio of total debt and Ebitda, DSCR and current ratio by six months to 1 October 2022 will provide relief to corporate borrowers who have availed of restructuring, said Gupta.

Bankers echoed the view. “Deferral for achievement of financial parameters under resolution framework 1.0 will address the revival difficulties faced by the businesses in meeting the operational parameters," said S.S. Mallikarjuna Rao, chief executive at Punjab National Bank.

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ABOUT THE AUTHOR
Shayan Ghosh
Shayan Ghosh is a national editor at Mint reporting on traditional banks and shadow banks. He has over 12 years of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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Published: 06 Aug 2021, 05:06 PM IST
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