The economy is passing through the most challenging time in recent history. The Covid-19 pandemic which mainly started as a health issue has evolved into a gigantic economic issue, on account of the changing circumstances which are leading to far-reaching consequences. The 24% decline in GDP in Q1 of the present financial year is the first indicator of the shape of things to come.
The reaction and response of the government were quick and the policy measures were taken to cope up with the difficult situation. The government and regulator took steps by way of a graded response as the situation evolved. Recognizing the urgent need the government came out with a massive Rupees 20 lacs crore economic stimulus package which is equivalent to approximately 10% of GDP. The package to revive the economy aims to rely upon credit expansion as the main thrust while at the same time attempting to address the point of availability of equity in the desired sectors and other related issues. Further stimulus towards demand creation is desired & expected from the Government.
On the regulatory front, RBI has moved in tandem with the government and came out with various notifications to deal with the situation. The initial response of RBI was to address the immediate liquidity issue so that the wheels of the economy are duly galvanized. In addition, RBI also announced a moratorium on payment of dues initially up to 31st May 2020 and further up to 31st Aug 2020.
This was to take care of the immediate adverse impact on production and revenue generation due to the lockdown announced with effect 24th Mar 2020. While this deferment of payment of bank dues was an interim step, the need for a sustainable long term solution was felt and duly recognized.
As expected and awaited the RBI announced the detailed resolution framework on 6 Aug 2020 to take care of the stressed borrowers on account of covid19, as a special window under the prudential framework on the resolution of stressed assets issued on June 7, 2019. The resolution framework inter alia envisaged the constitution of an expert committee to make recommendations on the required financial parameters. The committee headed by a seasoned banker Mr. K V Kamath submitted its recommendations on 4 Sep 2020 based on which RBI has come out with further guidelines on 7 Sep 2020.
|
Sr. No. |
Key Ratio |
Definition |
|---|---|---|
|
1 |
Total Outside Liabilities /Adjusted Tangible Net Worth (TOL/ATNW) |
Addition of long-term debt, short term debt, current liabilities, and provisions along with deferred tax liability divided by tangible net worth net of the investments and loans in the group and outside entities. |
|
2 |
Total Debt / EBITDA |
Addition of short term and long-term debt divided by the addition of profit before tax, interest, and finance charges along with depreciation and amortization. |
|
3 |
Current Ratio |
Current assets divided by current liabilities |
|
4 |
Debt Service Coverage Ratio (DSCR) |
For the relevant year addition of net cash accruals along with interest and finance charges divided by the addition of the current portion of long term debt with interest and finance charges. |
|
5 |
Average Debt Service Coverage Ratio (ADSCR) |
Over the period of the loan addition of net cash accruals along with interest and finance charges divided by the addition of the current portion of long term debt with interest and finance charges. |
As is apparent from the above, in addition to the traditional 3 ratios at sr. no. 1,3,4 two more ratios have been emphasized i.e. Total debt/ EBITDA and average DSCR. This has been done primarily to ensure the intrinsic viability of the project and borrower on the long term basis so that the stressed account survives and is revived in due course. These two ratios underline the inherent importance of profitability over a long period of time while curtailing too much reliance on debt.
The committee has suggested benchmark threshold parameters and ratios for 26 sectors based on the outstanding and severity of the impact and sector-specific characteristics. The TOL / ATNW ratio for example ranges between 3 for cement and chemical industries etc. to 10 for the commercial real estate sector. The total debt/EBITDA similarly ranges from 4 to 12 depending on the specific sectors. The committee has uniformly proposed thresholds for current ratio, DSCR, and ADSCR in most of the sectors except some specific categories. These ratios are to be achieved as per the time scheduled specified.
A welcome and commendable step is that the committee has given in its report rationale behind various stipulated benchmark/exceptions for example for aviation, real estate, and road sectors, etc. This is indicative of the kind of proactive, realistic approach and spirit required for handling this crucial subject of resolving these stress assets.
The RBI has also reiterated the requirement of compliance of other provisions of the resolution framework including the requirement of ICA.
The committee has emphasized that time is the essence in the present juncture and therefore deadlines of timeframe have been stipulated to ensure that the exercise is completed in a time-bound manner.
To achieve a success story in this respect all the stakeholders and agencies have to work in a coordinated manner. Institutions like RESURGENT have a significant role to play as an enabler since we have the requisite experience, know-how, and wherewithal to conceptualize evolve and help in the implementation of viable resolution plans.
