Online Courses (English)
This just in:

Daily Updates

Indian Economy

Resolution Plan by RBI for Covid-19 Stressed Assets

  • 08 Sep 2020
  • 7 min read

Why in News

The Re­serve Bank of India (RBI) has specified five fi­nan­cial ra­tios and sec­tor-spe­cific thresh­olds for res­o­lu­tion of Covid-19 re­lated stressed as­sets in 26 sec­tors.

Key Points

  • Recommended by: This resolution plan is based on the recommendations of the K.V. Ka­math com­mit­tee.
  • 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.
  • Background:
  • 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.

Way Forward

  • 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.
SMS Alerts
 

Please login or register to view note list

close

Please login or register to list article as bookmarked

close
 

Please login or register to make your note

close

Please login or register to list article as progressed

close

Please login or register to list article as bookmarked

close