Loan restructuring

Subject: Economy

Context:

A five-member expert committee headed by K V Kamath came out with recommendations on the financial parameters required for a one-time loan restructuring window for corporate borrowers under stress due to the pandemic.

Concept:

• Restructuring is a practice that allows banks to modify the terms of the loan when the borrower is facing financial stress.
• Banks do that to avoid the borrower being declared a defaulter and the loan having to be classified as a non-performing asset.
• It could be through a change in the repayment period / repayable amount / number of installments / rate of interest/ additional loans.

Kamath committee

• The RBI had formed a five member committee under the chairmanship of former ICICI Bank Chief Executive KV Kamath to make recommendations on the financial parameters to be considered in the restructuring of loans impacted by the Covid 19 pandemic.
• The committee will also scrutinize restructuring of loans above Rs 1500 crore. The term of the committee has been extended till June 30 2021.
• It recommended a graded approach to restructuring of stressed accounts based on severity of the impact on the borrowers.
• The committee has allowed banks to classify the accounts into mild, moderate and severe.
• In line with the mandate given by the RBI, Kamath committee has identified four financial parameters including total outside liabilities to adjusted tangible networth, total debt to EBITDA, debt service coverage ratio (DSCR), average debt service coverage ratio (ADSCR).
• The committee has recommended sector-specific thresholds for each ratio in respect of 26 sectors to be taken into account while finalizing the resolution plans.
• In its report the five member committee said power, construction, iron and steel, roads, real estate, wholesale trading, textiles, consumer durables, aviation, logistics, hotels, restaurants and tourism, mining are among the sectors that will need restructuring