Financial Ratios: The key financial ratios to be considered in the restructuring of loans impacted by the Covid-19 pandemic are:
Total Outside Liability to Adjusted Tangible Net Worth Ratio : This ratio is arrived at by addition of long-term debt, short term debt, current liabilities and provisions and deferred tax liability divided by tangible net worth net of the investments and loans. It indicates a company's financial leverage over the total net worth of the company.
Total debt to EBIDTA ratio: It is total debt divided by Earnings Before Interest, Depreciation, Taxes and Amortisation (EBIDTA). This ratio indicates the cash position of a company to pay back its debt. Higher ratio means the company has more leverage.
Current ratio: Current assets divided by current liabilities. Current ratio indicates the company's ability to pay short term debt and other liabilities which are due within a year's time.
Debt Service Coverage Ratio: It is the available cash to pay current debt.
Average Debt Service Coverage Ratio.
Sectors: The 26 sectors specified by the RBI include automobiles, power, tourism, cement, chemicals, gems and jewellery, logistics, mining, manufacturing, real estate, and shipping among others.
Eligibility: The resolution under this framework is applicable only to those borrowers who have been impacted on account of Covid.
Only those borrowers which were classified as standard and with arrears less than 30 days as at March 1, 2020 are eligible under the Framework.
The resolution plans shall take into account the pre-Covid-19 operating and financial performance of the borrower and impact of Covid-19 on its operating and financial performance.
Graded Approach: The lending institutions may, at their discretion, adopt a graded approach depending on the severity of the impact on borrowers while implementing the resolution plan.
The banks can classify the accounts into mild, moderate and severe as recommended by the committee.
Simplified restructuring may be done for mild and moderate stress. Severe stress cases would require comprehensive restructuring.
According to a report by India Ratings and Research, a high proportion of debt from the real estate, airlines, hotels, and other sectors had been restructured, the largest contribution had been from infrastructure, power, and construction.
Banks are likely to restructure up to Rs. 8.4 lakh crore of loans, or 7.7% of the overall system's credit.
The restructuring quantum from the corporate sector in FY21 could range between 3% and 5.8% of the banking credit, amounting to Rs 3.3-6.3 lakh Crores.
At least Rs. 210,000 crore (1.9% of banking credit) of non-corporate loans is likely to undergo restructuring after the announcement, which would have otherwise slipped into the Non-Performing Asset category.
India Ratings and Research is a credit rating agency that provides credit opinions regarding India's credit markets.
The loan restructuring must be a temporary step as continuing it for long may lead to an inflation surge, currency crisis, and financial instability due to accumulation of bad loans. It is important that post-Covid-19, regulatory measures are rolled out in a very careful and orderly manner and the financial sector returns to normal functioning without relying on the regulatory relaxations as the new norm.