The KV Kamath committee has selected 26 sectors which will require restructuring based on its analyses of financial parameters hit due to the economic crash caused by the coronavirus pandemic. In its report the five member committee said power, construction, iron and steel, roads, real estate, wholesale trading, textiles, consumer durables, aviation, logistics, hotels, restaurants and tourism, mining are among the sectors that will need restructuring. The committee selected five financial parameters related to leverage, liquidity, debt serviceability etc.
The financial parameters included total outside liability to adjusted tangible net worth, debt to EBIDTA, current ratio, debt service coverage ratio (DSCR) and average debt service coverage ratio (ADSCR) “Time is of essence at the present juncture. Considering the large volume and the fact that only standard assets are eligible under the proposed scheme, a segmented approach of bucketing these accounts under mild, moderate and severe stress, may ensure quick turnaround. To complete this task simplified restructuring for mild and moderate stress may be prescribed. Severe stress cases would require comprehensive restructuring,” the committee said.
The RBI had formed a five member committee under the chairmanship of former ICICI Bank CEO KV Kamath to make recommendations on the financial parameters to be considered in the restructuring of loans impacted by the Covid 19 pandemic. Other members of the committee are former State Bank of India executive Diwakar Gupta, current Canara Bank chairman TN Manoharan, consultant Ashvin Parekh and Indian Banks’ Association (IBA) Chief Executive Sunil Mehta who was also a secretary to the committee. The committee will also scrutinize restructuring of loans above Rs 1500 crore. The term of the committee has been extended till June 30 2021.
The committee has recommended sector-specific thresholds for each ratio in respect of 26 sectors to be taken into account while finalizing the resolution plans. In respect of other sectors where certain ratios have not been specified, the lenders shall make their own assessment keeping in view the contours, Reserve Bank of India said in a press release. The committee has recommended sector specific parameters which it said may be considered as guidance for preparation of resolution plan for a borrower in the specified sector. The plan has to 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 the first and second quarter of this fiscal and to assess the cash-flows for this, next and subsequent years.
“In these financial projections, the threshold total outside liability to adjusted tangible net worth and debt to EBIDTA ratios should be met by fiscal 2023. The other three threshold ratios should be met for each year of the projections starting from fiscal 2022. The base case financial projections need to be prepared as part of resolution plan,” the committee said. In respect of those sectors where the threshold parameters have not been specified by the committee, lenders can make their own internal assessments for the solvency ratios.
Total outside liability to adjusted tangible net worth ratio is the addition of long-term debt, short term debt, current liabilities and provisions along with deferred tax liability divided by tangible net worth net of the investments and loans in the group and outside entities. “The committee has uniformly proposed thresholds for current ratio, DSCR and ADSCR… 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 levels,” the committee said.
Current ratio is current assets divided by current liabilities while debt service coverage ratio (DSCR) is the addition of net cash accruals along with interest and finance charges divided by addition of current portion of long term debt with interest and finance charges. Average Debt Service Coverage Ratio (ADSCR) is the addition of net cash accruals along with interest and finance charges divided by addition of current portion of long term debt with interest and finance charges over the period of the loan.
The committee did not prescribe any threshold for current ratio for the automobile sector due to the “just in time inventory” business model for raw materials and parts, and finished goods inventory being funded by channel financing available from the dealers. For aviation it has kept current ratio at 0.40 and above because its cash and carry model and higher current liabilities in form of advance received from customers which are approximately two months of yearly sales of the airline industries. For real estate the committee has recommended to consider the parameters at project level rather than at entity level.