KV Kamath Committee’s Report on Resolution Framework for COVID-19 Related Stress
COVID-19 has disrupted the entire economy and
many businesses are suffering huge losses. During the 3rd Bi-monthly monetary
policy, our RBI governor had announced about the constitution of an expert
committee headed by veteran banker KV Kamath which would focus on the
resolution framework for corporate exposures amid this COVID-19 crisis.
On September 7, 2020, RBI published the report
of this expert committee and also a circular stating that recommendations have
been broadly accepted.
What is the KV Kamath Committee?
What recommendations were given for the
resolution framework?
Which businesses will be covered under the
suggested framework?
What about businesses that have not been
included under the framework?
KV Kamath committee is a 5-member committee formulated to oversee one-time debt recast i.e. to focus on resolution framework for corporate exposures.
The role of the committee is to give recommendations to RBI on the required financial parameters to be factored into the resolution plan.
RBI has set an aggregate exposure threshold of Rs. 1500 crore and above for the resolution plan. These businesses include only
those that were impacted due to COVID-19. As per RBI, only those borrower
accounts will be eligible for a resolution which were classified as standard,
but not in default for more than 30 days with any lending institutions as on
March 1, 2020.
Also, the resolution plan can be invoked
anytime till December 31, 2020, and will have to be implemented within 180 days
from the date of invocation.
The committee has picked up 26 sectors to recommend the financial parameters to be factored in the resolution plan.
All lending institutions shall mandatorily consider these ratios while finalizing the resolutions plan for the borrowers that are eligible for the same.
The committee has selected only 26 sectors,
what about the others?
In such conditions, where sector-specific thresholds
for the financial parameters have not been specified, lending institutions have
a free hand to make their internal assessments regarding the first two
parameters i.e., Total Outside liabilities to Adjusted Tangible Net Worth
(TOL/ATNW), Total Debt to Earnings Before Interest, Taxes, Depreciation, and
Amortization(Total Debt/EBITDA), but the Current Ratio and DSCR should be above
1 and Average DSCR should be more than 1.2.
Added to this, lending institutions are
allowed to consider other financial parameters as well and the resolution plan
should take into account the pre-COVID-19 operating and financial performance
of the borrower and its impact due to the pandemic to assess the future Cash
Flows.
For compliance purposes, lending
institutions need to keep monitoring the agreed ratios as per threshold as
financial covenants on an ongoing basis. If any breach is found, it has to be
rectified in a reasonable period, otherwise, it is to be considered as
financial difficulty.
Since the pandemic has impacted the businesses
in different manners, as per the committee institutions may adopt a graded
approach depending on the severity of the impact i.e., mild, moderate, and
severe.
The committee recommendations are a big relief
to the lending institutions. NPAs are already higher, and if instead of
providing resolution plans for the debt of businesses impacted due to pandemic,
we classify them as NPA, it's going to make it difficult for the businesses to
stand on their feet once again and drastically increase the NPA problems for
the lending institutions. In a nutshell, these recommendations on resolution
plan may help both the businesses hit due to pandemic which were otherwise
viable as well as lending institutions to curb the NPA problem to an extent
which gives us a win-win situation for now!
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