Background
With the current economic slowdown triggered by COVID-19, businesses now face an uphill battle to generate free cash flow to timely service their debts. The Reserve Bank of India ("RBI") had announced a slew of regulatory measures to mitigate the impact of COVID-19 on the borrowers ("COVID-19 Regulatory Package")1.
As an immediate relief to the borrowers, the COVID-19 Regulatory Package provided a moratorium for 6 (six) months, i.e., March 01, 2020 to August 31, 2020. Despite lockdowns, the COVID-19 infections have spiked worldwide, and India now holds 2nd position for the total number of the active COVID-19 cases worldwide. Worse yet, a second wave in Europe is looming large and the governments have imposed more stiff economic lockdowns. Undoubtedly, there is a risk of more permanent damage to different pockets of the economy. Without any clear exit strategy in sight, it is likely that the businesses will slip into en mass insolvencies and the economy will be burrowed into deeper recession.
To alleviate these concerns, on August 6, 2020, the RBI issued a broad framework for one-time restructuring to avoid the risk of exacerbating the non-performing assets, which could morph into systemic risk for the financial market ("OTR Framework")2.
One Time Restructuring & KV Kamath Committee Report
The OTR Framework offers a special window for lenders under the existing RBI (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 dated June 07, 2019 ("Resolution Framework")3, to implement a resolution plan for personal loans and commercial/ business exposures, without requiring a change in ownership while continuing to classify such exposures as standard assets. More importantly, it also includes all non-banking financial companies ("NBFCs") and housing finance companies within the definition of 'lender'.
Further, the RBI on September 07, 2020 released a report submitted by a panel ("Kamath Committee") appointed by the RBI and led by eminent banker Mr. KV Kamath ("Kamath Committee Report")4, which rolled out a very robust framework based on certain financial parameters to tailor a one-time restructuring package for a specific borrower. The Kamath Committee Report recommended the following key parameters, among others:
Parameter |
Brief Description |
26 (twenty-six) specified sectors |
Power, construction, iron and steel manufacturing, roads, real estate, trading wholesale, textiles, chemicals, consumer durables/FMCG, non-ferrous metals, pharma, logistics, gems and jewelry, cement, auto components, hotels, mining, plastic products manufacturing, automobile manufacturing, auto dealership, aviation, sugar, port and port services, shipping, building materials, and corporate retail outlets. |
5 (five) key financial ratios of borrowers |
The 5 (five) key ratios for 26 (twenty-six) sectors that have been announced based on leverage, liquidity and debt serviceability are: Total outstanding liability (TOL) divided by adjusted tangible net worth (Adjusted TNW), total debt divided by EBITDA, debt service coverage ratio (DSCR), average DSCR and current ratio. |
Non-specified sectors |
Lenders to make own assessment of parameters for other non-specified sectors. |
Basis for projected cashflows |
The resolution plan must be based on the borrower's pre-COVID operating and financial performance, and the impact of COVID-19 on its operating and financial performance in Q1 and Q2FY21, to assess the cash-flows for FY21/FY22 and subsequent years. |
Check on ratios |
Key financial ratios to be complied on an ongoing basis and unrectified breach to be considered as financial difficulty. |
Inter creditor agreements |
Encouragement for signing of inter credit agreements. |
Current ratio and debt service coverage ratio for sectors |
To be >=1 and >=1.2 respectively in all cases, if not specified otherwise. |
Subsequently, to remove certain doubts under the OTR Framework, the RBI released a set of frequently asked questions ("FAQs")5. Here is a high-level summary of the clarifications based on the FAQs:
Issue |
Clarifications |
Eligibility for resolution |
|
Applicability of OTR Framework for all exposures |
|
Kamath Committee approval and applicability of financial parameters |
|
Independent credit evaluation |
|
Classification of personal loans |
|
Eligibility of farm credits; joint liability group, selfhelp group and microfinance institution loans |
|
Specificities for real estate sector |
|
Restructuring of under implementation projects |
|
To conclude, the FAQs provide very critical and timely clarification for implementation of the OTR Framework.
Footnotes
1 Please see the links here: https://rbidocs.rbi.org.in/rdocs/Notification/PDFs/NOTI186B27003E9DB3D4FB49BDDF955F4289D68.PDF ; https://rbidocs.rbi.org.in/rdocs/Notification/PDFs/ASSETCLASSIFICATIONE5F6BD8C6D574086B7D36DC8CF7E13A9.PDF ; https://rbidocs.rbi.org.in/rdocs/Notification/PDFs/NT2455D86E6F80D9D4BC29C0DFAA43D76D9A4.PDF ; https://rbidocs.rbi.org.in/rdocs/Notification/PDFs/NOTI245FF065926FEA2467983EBF58B85010F87.PDF
2 Please see the link here : https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT168F87DBE0F71643B3B17BC8278108C16B.PDF
3 Please see the link here : https://rbidocs.rbi.org.in/rdocs/notification/PDFs/PRUDENTIALB20DA810F3E148B099C113C2457FBF8C.PDF
4 Please see the link here : https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1157
5 Please see the link here: https://www.rbi.org.in/Scripts/FAQView.aspx?Id=137
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.