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Thursday, June 24, 2021

K V Kamath panel framework better than CDR, but may just postpone recognition of stress: Analysts

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Mumbai: The K V Kamath panel’s loan recast recommendations are better than the erstwhile corporate debt restructuring (CDR) mechanism, but these may result in banks postponing recognition of stress through short-term relief, analysts said on Tuesday. In the absence of an economic revival and sector-specific packages to be introduced by the government, the new mechanism will be “challenging” and may also end up induce uncertainty in the credit markets as banks focus on working out the recast plans in the limited window, they said.

The Reserve Bank of India (RBI) has operationalised the guidelines from Tuesday, which give relief to 26 listed sectors affected by the coronavirus pandemic and stress on banks factoring in leverage, liquidity and debt serviceability before admitting a case.

The framework is for a limited time-period and stresses upon upfront heavy provisioning, stringent financial thresholds for eligibility and supervisory mechanism, analysts at the domestic brokerage Emkay said, terming it as “far better than CDR”.

They said the CDR was extensively used to suppress non-performing assets and had a success rate of as low as 15 per cent.

Stressed borrowers in real estate, traders, hotels/restaurants segments will be helped, but resolving stress in lumpy power and infrastructure sectors through this mechanism will be challenging without economic revival and sector-specific packages or initiatives by the government, they said.

However, analysts at Anand Rathi sounded a bit circumspect, saying this is a step in the right direction but given the lenders’ track record, it will only “postpone the stress”.

It feared a “good portion” of the accounts which will be restructured will eventually turn non-performing and added that it gives a “short-term relief” alone.

According to the committee, Rs 38 lakh crore of debt is held by banks in the identified sectors, constituting about 37 per cent of the overall industry assets.

“The Kamath committee recommendations induce a degree of uncertainty in the credit market as banks work out restructuring plans with their customers,” analysts at BofA Securities flagged, maintaining their 8 per cent credit growth target for the system.

ICICI Securities said the framework is much broader than anticipated but leaves some scope for subjectivity as thresholds are to be met 2021-22 onwards based on base-case financial projections.

Japanese brokerage Nomura said subjectivity involved around cashflow projections does increase some scope of misuse as well in unviable cases.

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