Kamath Committee’s parameters accepted
The Reserve Bank of India (RBI) on 7 September 2020 said it has broadly accepted the recommendations by the KV Kamath-led committee on the financial parameters to be considered in the restructuring of loans impacted by the Covid 19 pandemic. The central bank said the committee has recommended financial parameters that include aspects related to leverage, liquidity and debt serviceability.
- The committee has recommended financial ratios for 26 sectors, which could be factored by lending institutions while finalizing a resolution plan for a borrower.
- RBI also issued a circular specifying five specific financial ratios and the sector-specific thresholds for each ratio in respect of 26 sectors to be taken into account while finalizing the resolution plans.
- These five ratios are: Total outside liabilities/adjusted tangible net worth (TOL/ATNW), total debt/EBITDA, current ratio, debt service coverage ratio (DSCR), average debt service coverage ratio (ADSCR).
- In respect of other sectors where certain ratios have not been specified, the lenders shall make their own assessment keeping in view the contours of the circular dated August 6 and the follow-up circular issued today, the central bank said.
- The current ratio and DSCR in all cases shall be 1.0 and above, and ADSCR shall be 1.2 and above, the central bank specified.
- While these ratios are intended as floors or ceilings, as the case may be, the resolution plans should 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 at the time of finalising the resolution plan, to assess the cash flows in subsequent years, while stipulating appropriate ratios in each case.
- It added that lending institutions are free to consider other financial parameters as well while finalizing the resolution assumptions in respect of eligible borrowers apart from the prescribed mandatory key ratios and sector-specific thresholds.
- RBI said that given the differential impact of the pandemic on various sectors/entities, the lending institutions may adopt a graded approach depending on the severity of the impact on the borrowers, while preparing or implementing the resolution plan.
- Such graded approach may also entail classification of the impact on the borrowers into mild, moderate and severe, as recommended by the committee.
- On August 6, the RBI had formed a five-member committee under the chairmanship of former ICICI Bank CEO Kamath to make such recommendations.