Kamath Committee Sets Thresholds For Debt Restructuring Across 26 Sectors

A Reserve Bank of India appointed committee, headed by veteran banker KV Kamath, has recommended that the banking industry look at at least five financial parameters before taking a decision on restructuring.

The five-member committee has recommended minimum and maximum thresholds for these five parameters, which lenders must assess before approving a restructuring request. The committee has specified different thresholds across 26 sectors which may have been impacted by the Covid-19 pandemic.

The committee suggested that lenders track the following parameters:

• Total outside liabilities /adjusted tangible net worth
• Total debt/Ebitda
• Current ratio
• Debt service coverage ratio
• Average debt service coverage ratio

In August, the RBI had permitted one-time restructuring of corporate advances and personal loans amid concerns of a spike in bad loans due to the Covid-19 pandemic. The crisis could push up gross non-performing assets of Indian banks to a 20-year high of 12.5-14.7% of total loans in FY21, showed stress tests conducted by the RBI as part of its financial stability report.

The restructuring window will prevent that immediate spike in bad loans. Indian banks could end up restructuring 7.7% of outstanding loan exposures, or nearly Rs 8.4 lakh crore, via the Reserve Bank of India’s restructuring window, according to India Ratings & Research.

Watch a conversation on the fineprint of the recommendations with Abizer Diwanji of EY and former banker VG Kannan below:

Sector-Wise Recommendations

The sector-specific benchmarks for restructuring for some key industries are as below:

Aviation

• Total outside liabilities/adjusted tangible net worth: <=6
• Total debt/Ebitda: <=5.5
• Current ratio: >=0.40
• Debt service coverage ratio: NA
• Average debt service coverage ratio: NA
• Kamath committee noted that the cash-and-carry model of aviation companies adds high current liabilities owing to advances received from customers.
• Moreover, airlines enjoy credit of typically 6-9 months from vendors, including fuel payments.
• Owing to these two factors, current ratio is kept at or above 0.40.
• Similarly, debt service coverage ratio and average debt service coverage ratio is not applicable for aviation companies since most companies here refinance their debt on a regular basis.

Hotels

• Total outside liabilities/adjusted tangible net worth: <=4
• Total debt/Ebitda: <=5
• Current ratio: >=1
• Debt service coverage ratio: >=1.2
• Average debt service coverage ratio: >=1

Real Estate: Commercial

• Total outside liabilities/adjusted tangible net worth: <=10.0
• Total debt/Ebitda: <=12
• Current ratio: >=1
• Debt service coverage ratio: >=1
• Average debt service coverage ratio: >=1.2
• The Kamath committee believes that considering the nature of real estate projects, the financial parameters should be considered at project level, rather than at entity levels.

Real Estate: Residential

• Total outside liabilities/adjusted tangible net worth: <=10
• Total debt/Ebitda: <=12
• Current ratio: >=1
• Debt service coverage ratio: >=1.2
• Average debt service coverage ratio: >=1
• The Kamath committee believes that considering the nature of real estate projects, the financial parameters should be considered at project level, rather than at entity levels.

Power Generation/Transmission

• Total outside liabilities/adjusted tangible net worth: <=4
• Total debt/Ebitda: <=6
• Current ratio: >=1
• Debt service coverage ratio: >=1.2
• Average debt service coverage ratio: >=1

Power Distribution

• Total outside liabilities/adjusted tangible net worth: <=3
• Total debt/Ebitda: <=6
• Current ratio: >=1
• Debt service coverage ratio: >=1.2
• Average debt service coverage ratio: >=1

Gems & Jewellery

• Total outside liabilities/adjusted tangible net worth: <=3.5
• Total debt/Ebitda: <=5
• Current ratio: >=1
• Debt service coverage ratio: >=1.2
• Average debt service coverage ratio: >=1

Roads

• Total outside liabilities/adjusted tangible net worth: NA
• Total debt/Ebitda: NA
• Current ratio: NA
• Debt service coverage ratio: >=1.1
• Average debt service coverage ratio: >=1
• Certain ratios are not applicable for the road sector since financing is cash flow based and at SPV level where the level of debt is decided at the time of initial project appraisal.

The Backdrop

The regulator had set up the expert committee in August, after it decided to allow lenders to restructure loans without marking these assets as NPAs. The provision was applicable to those loans which were not in default for more than 30 days as on March 1. The resolution plan should be invoked by Dec. 31, 2020 and implemented within 30 days, the RBI had said.

However, to avoid a return to the past when large scale discretionary restructuring led to under-reporting of bad loans, the regulator set up an expert committee headed by KV Kamath to recommend “required financial parameters, along with the sector specific benchmark ranges for such parameters, to be factored into each resolution plans.”

This committee will also vet restructuring of loans above Rs 1500 crore.