Following RBI’s announcement of a framework for one-time restructuring of loans, the expert committee headed by Mr. K.V. Kamath submitted its report on 4 September 2020, recommending a list of five financial parameters for 26 sectors which may be factored by lending institutions while finalizing a resolution plan for a borrower.The RBI has broadly accepted the recommendations of the report and issued a follow-up circular in this regard.

The five key parameters prescribed are (i) Total Outside Liabilities (TOL) / Adjusted Tangible Net Worth (ATNW), (ii) Total Debt / EBITDA, (iii) Current Ratio of assets to liabilities, (iv) Debt Service Coverage Ratio and (v) Average Debt Service Coverage Ratio. Lending institutions are mandated to consider these key ratios while finalizing the resolution plans in respect of eligible borrowers. While the prescribed ratios are intended as floors or ceilings, as the case may be, the resolution plans, while stipulating appropriate ratios in each case, should take into account the pre-Covid-19 operating and financial performance of the borrower and the impact of Covid-19 on such performance to assess the cashflows in subsequent years.

The RBI circular also provides for sector-specific thresholds (ceilings or floors, as the case may be) for each of these key ratios. For those sectors where the sector-specific thresholds have not been specified, the lenders are required to make their own assessment keeping in view the contours of the framework and the follow-up circular. Lending institutions are, however, free to consider other financial parameters as well while finalizing the resolution assumptions in respect of eligible borrowers. The abovementioned parameters will apply even in cases when there is only one lending institution with exposure to an eligible borrower.

Lending institutions are expected to ensure compliance to TOL/ATNW agreed as per the resolution plan at the time of implementation itself. Nevertheless, in all cases, this ratio is required to be maintained as per the resolution plan by 31 March 2022 and on an ongoing basis thereafter. However, wherever the resolution plan envisages equity infusion, the same may be suitably phased-in over this period. All other key ratios are required to be maintained as per the resolution plan by 31 March 2022 and on an ongoing basis thereafter.

The mandatory requirement of Inter-Creditor Agreement (ICA), wherever applicable, and maintenance of an escrow account after implementation of a resolution plan, will be applicable at the borrower-account level, i.e. the legal entities to which the lending institutions have exposure to, including a special purpose vehicle set up for a project. Compliance with this requirement will be assessed for all lending institutions as part of the supervisory review.

To refer to the follow-up circular dated 7 September 2020, click here. To refer to the report of the expert committee dated 4 September 2020, click here.

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