15 September 2020
RBI announced a resolution framework for COVID-19 related stress on August 6, 2020 (‘COVID Framework’) as a special one-time restructuring mechanism under the aegis of the Prudential Framework on Resolution of Stressed Assets issued on June 7, 2019 (for details, please refer to our Client Alert on August 20, 2020). The sector specific financial parameters to govern resolution plans under this COVID Framework have now been notified.
Expert Committee
RBI had constituted an expert committee under the chairmanship of Mr. K. V. Kamath which was tasked with (amongst other things) identifying suitable financial parameters to be factored into the assumptions underlying any resolution plan under the COVID Framework and to recommend sector specific parameters for the ratios to act as relevant floor / cap conditions to be met under the resolutions plans.
The Financial Parameters
The expert committee submitted its report (notified by the RBI on September 7, 2020) setting out the key financial ratios and their applicability to specific sectors – which are to be kept in mind by lenders while finalising resolution plans under the COVID Framework. The 5 key ratios identified are:
Expert Committee
RBI had constituted an expert committee under the chairmanship of Mr. K. V. Kamath which was tasked with (amongst other things) identifying suitable financial parameters to be factored into the assumptions underlying any resolution plan under the COVID Framework and to recommend sector specific parameters for the ratios to act as relevant floor / cap conditions to be met under the resolutions plans.
The Financial Parameters
The expert committee submitted its report (notified by the RBI on September 7, 2020) setting out the key financial ratios and their applicability to specific sectors – which are to be kept in mind by lenders while finalising resolution plans under the COVID Framework. The 5 key ratios identified are:
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Total Outside Liabilities / Adjusted Tangible Net Worth
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Total Debt / EBITDA
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Current Ratio
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Debt Service Coverage Ratio (DSCR)
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Average Debt Service Coverage Ratio (ADSCR)
The expert committee has identified 26 sectors including logistics, mining, power, real estate and construction for which sector specific ratios have been prescribed. In sectors where thresholds have not been specified, lenders are required to make their internal assessments while ensuring that the current ratio and DSCR is at least 1 and ADSCR is at least 1.2. Lending institutions are free to consider other financial parameters apart from the mandatory key ratios and sector specific thresholds.
Other Parameters
In addition, lenders are required to take into account pre-COVID-19 performance of the borrower and the impact of COVID-19 at the time of finalising the resolution plan in assessing future cash flow projections and financial performance of the borrower. Further, lending institutions may at their discretion 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 or severe, as recommended by the expert committee.
Signing of the inter-creditor agreement (‘ICA’) as a mandatory requirement has been reemphasised and it has been clarified that taking on additional provisions if the ICA is not signed is not a substitute. The RBI also states that non-compliance with this requirement will be considered during supervisory reviews. Historically, many RBI restructuring schemes have gone under-utilised because the kick-off ICAs were never signed. Is this slightly terse language by the RBI a signal that it is going to get serious with laggards? The RBI has been known to use gentle words when it means serious business.
Other Parameters
In addition, lenders are required to take into account pre-COVID-19 performance of the borrower and the impact of COVID-19 at the time of finalising the resolution plan in assessing future cash flow projections and financial performance of the borrower. Further, lending institutions may at their discretion 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 or severe, as recommended by the expert committee.
Signing of the inter-creditor agreement (‘ICA’) as a mandatory requirement has been reemphasised and it has been clarified that taking on additional provisions if the ICA is not signed is not a substitute. The RBI also states that non-compliance with this requirement will be considered during supervisory reviews. Historically, many RBI restructuring schemes have gone under-utilised because the kick-off ICAs were never signed. Is this slightly terse language by the RBI a signal that it is going to get serious with laggards? The RBI has been known to use gentle words when it means serious business.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
