Single loan overhaul: a delicate road awaits the Kamath panel, experts say

The Reserve Bank of India (RBI) formed the KV Kamath Committee on One-Time Loan Restructuring on Friday, but experts say it won’t be easy for the panel to negotiate the bumpy road that led to everyone’s failure. these efforts in the past.

The project was well received by former central bankers known for their conservatism. For example, recently retired RBI Deputy Governor NS Vishwanathan, one of the main architects of the original June 7 resolution circular, said Commercial standard that he “fully” endorsed the resolution process declared by the RBI.

In recent days, Vishwanathan has advocated for strict restructuring processes if necessary, and was known to have introduced the one-day default standard (February 12, 2018) that companies can be labeled as failing and fired for bankruptcy if they delay. even to pay. for a day.

He said his idea of ​​resolution during these Covid times would be very similar.

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Besides seasoned banker Kamath, other members of the committee will include former State Bank of India Managing Director Diwakar Gupta, who will join on September 1, after his tenure as Vice President of the Asian Development Bank ends; TN Manoharan, effective August 14 after completing his term as Chairman of Canara Bank; banking expert Ashvin Parekh; and Sunil Mehta, Managing Director of the Association of Indian Banks (IBA) as Secretary-Member.

The committee may consult or invite any other person and will recommend the financial parameters to be taken into account, with sector benchmarks for these parameters. It will undertake process validation for resolution plans, “without going into business aspects,” of all accounts with aggregate exposure of Rs 1,500 crore and above at the time of invocation, the RBI said. “The committee will submit its recommendations on the financial parameters to the Reserve Bank which, in turn, will notify them with the changes, if any, within 30 days,” the central bank said. Experts say there is simply not enough time. With a member joining after September 1 and the central bank taking up to 30 days to notify, banks will have very little time to complete the first stage of restructuring by December 31. Experts say the process could be speeded up even though the veterinary committee can accounts on a specific industry basis, and not go deep on the books.

The traps

The sheer number of companies lining up for restructuring would be mind-boggling. A Commercial standard Analysis of companies that reported results for the April to June quarter shows that companies that reported operating losses or low interest coverage rates (ICRs) accounted for nearly 45% of business borrowing. . All of these companies would certainly want relief.

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Mrutyunjay Mahapatra, MD and CEO of the former Syndicate Bank, said the most crucial guarantee for banks would be to seek possible “greening” of loans in the last two quarters before March 1, when the account was due to be “standard” according to RBI guidelines.

“A loan account shows signs of strain two quarters before it becomes ‘default’. This is usually when “permanent greening” occurs. Thus, there should be clear parameters for monitoring the last two quarters of loan accounts. This should be subject to independent review, ”Mahapatra said. He added that banks need to look at the intra-group leverage of companies. And then there is the potential fallout for bankers if it turns out that some accounts have misused the mechanism. In a note to the parliamentary committee on estimates of non-performing bank assets in September 2018, former RBI Governor Raghuram Rajan said that “risk-averse bankers, seeing the arrests of some of their colleagues, are not just unwilling to accept the write-downs and push a restructuring to completion, without the process being blessed by the courts or prominent figures, “leading to an” endless “delay in the process. is now limited in time and is due to end by June, experts say it would be several months beyond June before the banking system can breathe a sigh of relief.

Restructured companies must repay their debt within 30 days at least for the first 10 percent of loans. Otherwise, they would be declared in default and bankruptcy proceedings could be initiated. A large number of companies could find their way there, experts fear.

“It’s important to distinguish between a legacy issue and a Covid issue. Many units in India were having issues even before Covid, so March 1 is a good date from that perspective, ”said a former RBI deputy governor.

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Another senior banker said the problem with previous restructuring plans was that banks did not have a structure in place to do a thorough review of the proposals. “So if one bank rejected a borrower’s proposal, it became easier for the borrower to convince the other bank and get acceptance,” the person said.

He added that risk management and economic planning should be integrated into the organizational structure of the bank, as the restructuring would require monitoring the borrower’s accounts for a period of up to two years. The focus should be on building the capacity of banks, in addition to defining parameters for restructuring loans, the person added.

The former deputy governor agrees with this assessment.

Bankers can’t run businesses

“The biggest problem with any restructuring plan is how I predict my turnover and my bottom line,” said the former vice governor. Banks engaged in the old mechanism of corporate debt restructuring (CDR) had no idea, so they used to “cook things up.” They used to put their own income estimates and a discount rate of their own discretion to calculate the net present value of their sacrifice, ”the former RBI official said.

“There is no way, even now, that the banks would be able to calculate that and this is where the Kamath panel can define entry points and establish a benchmark based on sectors. The panel does not need to review individual accounts to approve a resolution, but can set rules for the sectors that have been hit hardest by the pandemic and in need of restructuring. , such as aviation, tourism, hospitality, the person said.

It is also important to judge that not all companies will need a restructuring, even if all would line up for one. The banks and the Kamath committee must be on their guard to avoid them.

“There shouldn’t be any optimistic predictions in these plans. When making a restructuring plan, you should take into account debt service coverage ratios, depending on your level of turnover and your EBITDA margins (earnings before interest, depreciation, taxes and depreciation). You try to see if the interest and payments are repairable and probably make new loans that also need to be repaid, ”said another former RBI deputy governor.

If there is a need to depreciate equity and bring in more capital, that should also be part of the plan, and there should be provisions for additional collateral for additional loans. Experts also say that if the restructuring fails, these companies cannot be taken to insolvency court. There will not be enough buyers, the banks will have to take huge discounts and bad debts will pile up.

“If businesses fail, the banks will. And what is worrying is that the 10 percent provision is just not enough to protect the system even though the governor’s main concern is to protect the banking system and not necessarily businesses, ”said a former vice-governor cited above.