WHY IN NEWS
- Recently Reserve Bank of India (RBI) published its monetary policy in which RBI permit banks to restructure loans to provide relief to large corporates , micro small and medium enterprise (MSME) and individuals who get affected because of covid 19 pandemic .
- For this purpose RBI set up a committee headed by KV Kamath and made its scheme on recommendations of this committee
WHAT IS LOAN RESTRUCTURING
Loan restructuring is a process that permits a private individuals or company facing liquidity problems and are under stress to repay their loans to lessen and renegotiate their errant debt to improve or restore their liquidity so that they can continue their work .
It can be achieved through following ways
- By reducing rate of interest on loans or by increasing payment duration
- By debt for equity swap ( lenders may cancel some or all the debt for equity in company)
- By bondholder haircut ( lenders may leave some part of interest or capital of loan )
MOTIVES BEHIND IT
- To prevent borrowers with good track record who defaulted because of covid 19 pandemic to be classified as non performing assets (NPA)
- It is less expensive than bankruptcy
KV KAMATH COMMITTEE
- A 5 member committee was set up by RBI for restructuring of loan
- Members of committee – [chairman] KV Kamath (former CEO of ICICI bank), Diwakar Gupta ( former SBI executive ) ,TN Manoharan ( current chairman of Canara bank), Ashvin Parekh (consultant) , Sunil Mehta ( CEO of Indain Banks Association ).
- Committee’s work was to provide parameters for restructuring of corporate loans (single time only)
- To formulate resolution plans for particular sector for all accounts and covering total loan value upto 1500 crore and above
KEY RECOMMENDATIONS
- Committee has suggested to consider 5 financial ratios and sector specific approach for each ratio with respect to 26 sectors selected by committee
- these ratios are – total outside liabilities to adjusted tangible net worth , total debt to earnings before interest taxes depreciation and amortization (EBIDTA) , debt service coverage ratio (DSCR) , current ratio , average debt service coverage ratio (ADSCR)
- RBI to decide sector specific ceiling for these ratio’s and should be followed by lenders
- Banks to group accounts into mild, moderate , and severe as recommended
- Severely affected sectors to be provided with maximum possible debt to EBIDTA ratio for restructuring
BENEFICIARIES OF SCHEME
- Only those companies or individuals are eligible who were at default for not more than 30 days as on march 1 2020.
IMPLEMENTATION
- While preparing policies banks have to follow RBI guidelines
- Loans categorized as standard as on march 1 2020 will only be allowed for restructuring
- Banks have to sign an Intercreditor Agreement (ICA) for implementation of restructuring scheme
- Process should be accepted by lending institutions with 75% in value and 60% in numbers
- Plan will be implemented before 180 days from date of acknowledgement and will be invoked before 31 dec 2020
SAFEGAURDS AGAINST MISUSE
- Restructuring can be done through the extension of remaining term by maximum of 2 years with or without moratorium and involve altering of loan into equity
- lenders who are signing ICA will have to make a 10% provision and for non signing lenders at 20%
- borrowers account can be downgraded as NPA , if he is at default with any lenders who signed ICA during monitoring period ( after 30 days review period lenders can downgrade them as NPA )
sources – The indian express and the hindu
shivani patel