What Analysts Made Of Kamath Committee Recommendations On Debt Restructuring

The recommendations by the KV Kamath committee will improve the transparency of the loan restructuring process that the Indian banking system is about to undertake, said analysts in response to details released by the central bank on Monday.

Analysts believe that while the financial parameters suggested by the panel are reasonable, some borrowers may not be able to meet the granular requirements prescribed by the committee, resulting in a spike in bad loans.

The RBI-appointed committee suggested that lenders consider at least five financial parameters before taking a decision on restructuring.

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

The panel suggested thresholds for each of these benchmarks depending on the sector, so decision-making can be easier. Besides, lenders may look at other parameters, depending on their assessment of the sector. The committee allowed discretionary approaches for sectors it did not include in the list of 26.

“Our biggest problem has been to make things too granular, such that they become impossible to achieve and then people start fudging numbers to achieve them and then this is where the programme fails,” said Abizer Diwanji, partner (financial services) at EY.

But, according to L Vishwanathan, partner at Cyril Amarchand Mangaldas, the new parameters will bring in uniformity and rigour in assessing the impact of the pandemic on companies and preparing resolution plans. Also, the committee and the RBI have stipulated monitoring for these financial parameters on an on-going basis.

“The RBI has sought to strengthen the ICA (inter-creditor agreement) mechanism by clarifying that the ICA is mandatory, and compliance of signing of the ICA shall be assessed as part of its supervisory review. This should encourage signing of the ICA and preparation of resolution plans,” Vishwanathan said. “The requirement for maintenance of escrow accounts will also aid monitoring and control.”

Banks are expected to sign the ICA within 30 days of invoking the restructuring scheme. Banks that fail to do so, will be required to make 20% provisions against the account compared with the 10% requirement for other lenders.

Here's what analysts have to say:

Jefferies

• Thresholds have been set reasonably, so most companies facing stress should be able to see restructuring.
• Restructuring to begin only after Supreme Court pronounces order in interest-on-interest case.
• Provisions to be higher as slippages are expected to rise for banks.

Macquarie Research

• Recommendations by Kamath committee are likely to result in borrowers who are not able to meet financial benchmarks and would eventually slip to non-performing category.
• The eventual “stressed” book will be 8-10% of the banking system loan book.
• Out of this, 3-5% will fall into non-performing category immediately, attracting higher provisions.

Motilal Oswal

• This is a prudent attempt by the expert committee in laying down the financial parameters for impacted sectors.
• It would enable transparency in restructuring across lenders when focusing on the efficacy of the resolution plan.
• Recent discussions with various bankers suggest that for mid-sized banks, expect 20-25% of the moratorium book to be restructured, while large banks expect restructuring in the low single digits.
• Overall, large banks have strengthened their provision coverage on existing non-performing loans and built higher Covid-19- related provisions.

Bank of America

• Recommendations will induce a degree of uncertainty in the credit market as banks work out restructuring plans with their customers.

ICRA

• The broad parameters suggested by the expert committee specify the boundary conditions for restructuring.
• The efficacy of resolution plans would depend on the appropriateness of the assumptions taken by lenders while taking a view on business recovery.
• Aggressive assumptions on recovery could mean a failure of the resolution plan, while highly conservative assumptions could mean leaving money on the table.

Anand Rathi

• Restructuring will only provide short-term relief to the banks.
• Given the impaired ability to generate healthy cash flow, some of these disruptions may continue for a few more months.
• A good portion of these restructured accounts may eventually turn non-performing.