Context: Recently, the Reserve Bank has specified five financial ratios and sector-specific thresholds for resolution of COVID-19 related stressed assets in 26 sectors, including auto components, aviation, and tourism.
Background

• The Reserve Bank of India (RBI) had constituted the proposed expert committee under the chairmanship of K.V. Kamath to make recommendations on norms for the resolution of COVID-19 related stressed loans.
• The K.V. Kamath committee submitted its report on September 4, 2020.

Kamath report

• In its report, the five-member panel led by K.V. Kamath identified five financial parameters to gauge the health of sectors facing difficulties.
• These include total outside liabilities to adjusted tangible net worth, total debt to earnings before interest, taxes, depreciation, and amortization (Ebitda), debt service coverage ratio (DSCR), current ratio and average debt service coverage ratio (ADSCR).
• RBI has allowed greater leeway to the real estate sector with the highest debt to Ebitda ratio permissible among the 26 sectors it has identified.
• (The debt to Ebitda ratio indicates how well a company can service its loans and other liabilities, with a lower ratio implying better capability.)
• 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.

Moving Ahead

• While the ratio has been kept at less than or equal to nine for residential real estate, it has been pegged at less than or equal to 12 for commercial real estate.
• This gives the sector more headroom in terms of financial performance and the projections thereof.
• However, other ratios such as adjusted tangible net worth, current ratio and debt service coverage ratio have also been specified for the realty sector, which are more or less on a par with other industries.
• RBI said in a circular accompanying the recommendations that banks are expected to comply with adjusted tangible net worth agreed as per the resolution plan at the time of implementation itself.