Topics Covered: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
RBI’s debt restructuring scheme:
Rating agency Crisil has said that as many as 99% of companies rated by it were unlikely to opt for the one-time debt restructuring scheme.
- The finding is based on a preliminary analysis of 3,523 non-micro small and medium enterprise (MSME) companies.
- This is despite two-thirds of the rated entities being eligible for restructuring, based on the parameters proposed by the KV Kamath committee.
Improving business sentiment and the ongoing, gradual recovery has minimised the need to avail of the facility, according to Crisil.
In August this year, RBI set up a committee headed by K.V. Kamath on restructuring of loans impacted by the Covid-19 pandemic.
- The Committee was tasked to recommend parameters for one-time restructuring of corporate loans.
Recommendations made by the Committee:
- Graded approach to restructuring of stressed accounts based on severity of the impact on the borrowers- Banks can classify the accounts into mild, moderate and severe as recommended by the committee.
- Five financial parameters to gauge the health of sectors facing difficulties- total outside liabilities to adjusted tangible networth, 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).
- 26 sectors have been identified including auto, aviation, construction, hospitality, power, real estate and tourism.
Applicability of these recommendations:
- The committee was to scrutinise restructuring of loans above ₹1500 crore.
- 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.
Why these measures were necessary? How serious is the debt problem?
Corporate sector debt worth Rs 15.52 lakh crore has come under stress after Covid-19 hit India, while another Rs 22.20 lakh crore was already under stress before the pandemic.
- This effectively means Rs 37.72 lakh (72% of the banking sector debt to industry) remains under stress.
- This is almost 37% of the total non-food bank credit.
- Besides, Companies in sectors such as retail trade, wholesale trade, roads and textiles are facing stress. Sectors that have been under stress pre-Covid include NBFCs, power, steel, real estate and construction.
- What are NBFCs?
- Difference between Payment Banks and commercial banks.
- KV Kamath Committee is related to?
- Key recommendations.
Sources: the Hindu.