The Reserve Bank of India (RBI) has approved the KV Kamath Committee's report on the resolution framework. The committee was formed to make recommendations on the required financial parameters and sector-specific benchmarks to be factored in under the resolution framework.
What is the resolution framework and why is it required?
On August 6, 2020, the Reserve Bank of India had issued a circular on 'Resolution Framework for COVID-19 related Stress'. The objective was to mitigate the financial stress faced by borrowers on account of the economic fallout of the COVID-19 pandemic.
Under this framework, the RBI has allowed banks to refrain from classifying stressed accounts as Non-Performing Assets (NPAs) for a certain period of time; even in the event of default.
The objective is to support economic recovery and help hard-pressed individuals and companies to tide over the ongoing coronavirus crisis. At the same time, it would prevent fresh NPAs flooding the banking system post the end of the moratorium period.
What's in the report?
As per the expert committee, ~Rs 38 lakh crore of banking sector debt has been in key sectors affected by COVID-19. It thus forms ~37% of the total banking system credit. Furthermore, the top 10 affected sectors account for ~29% of the total banking credit.
Among the banks, total exposure toward the key troubled sectors is the highest for SBI (~31%) and the lowest for ICICI Bank (~15%).
What has the committee recommended?
The KV Kamath committee has clearly laid down financial parameters for approving restructuring plan across 26 sectors and identified five key ratios for considering a resolution plan:
a) Total outside liability / adjusted tangible net worth, b) Total debt/EBITDA, c) Current ratio, d) Debt service coverage ratio, and e) Average debt service.
For those sectors where the threshold parameters have not been specified, lenders could use their own assessments for the solvency ratios.
The committee has further suggested that the tenure of a loan could be extended by two years maximum. The banks can maintain asset classification as standard or upgrade to standard subject to the resolution plan being implemented and resolutions in accounts greater than Rs 100 crore would require an Independent Credit Evaluation (ICE) by a credit rating agency.
Overall, the KV Kamath committee has made a prudent attempt to bring standardization to the resolution process across the financial sector. It is also expected to provide much-required support to the businesses and individuals facing Covid-19 led disruptions.
We have a #Teji outlook for the large banks as their restructuring is expected to stay in the low single digits. The mid-sized banks, however, are expected to see the restructuring of ~20–25% of the moratorium book.