The Reserve Bank of India (RBI), announcing its monetary policy review on Thursday, allowed banks to do one-time loan restructuring without classifying them as non-performing assets (NPAs). This will provide a huge relief to banks as well as corporates impacted by the COVID-related disruption in their businesses. There will not be any immediate provisioning or capital absorption pressure on banks, though they will have to build safeguards for any future losses after the end of the two-year restructuring. Similarly, the corporates impacted by COVID-19 will get the benefit of restructuring in these difficult times. The RBI has also set an expert committee under the chairmanship of K V Kamath that will make recommendations to the central bank on the required financial parameters, along with the sector-specific benchmark ranges for such parameters to be factored into resolution plans. Below are the details of the five pillars of RBI's one-time loan restructuring:
1) Prudent entry norms
The RBI has stated that the benefit of restructuring will be available to corporates classified as standard accounts and not in default for more than 30 days with any lending institutions as on March 1, 2020. Clearly, the restructuring is available to healthy corporates, which are facing stress because of the COVID-19 disruption. Sectors like hospitality, tourism and transportation etc will fit into the scheme as they were standard accounts before COVID-19 and got impacted severely post the virus outbreak and nationwide lockdown. Many suggest the slowdown in the economy before the outbreak of coronavirus had impacted a lot of industries which will not be able to get the restructuring benefits. Similarly, many players in the stressed infrastructure, real estate and construction sectors won't get the benefit under the scheme (under more than 30-day default) as they were already under severe financial stress before the spread of COVID-19.
2) Clearly defined boundary conditions
Banks' board policies have to be in place before undertaking any restructuring exercise. The time available for restructuring is till December this year. However, banks have to implement the restructuring scheme within six months from the date of the corporate asking for a restructuring under the scheme. This implies that a cut-off date for implementing the restructuring is set as June 2021. The decision to offer the restructuring to a particular corporate has to be decided by a minimum threshold voting limit among the banks under a consortium lending, which the Kamath committee would decide. The RBI has set a 10 per cent provisioning requirement for such structured assets for banks, but if a bank is not participating in a consortium-based restructuring, the provisioning will be at a higher rate of 20 per cent for that particular bank.
3) Specific binding covenants
The covenants provide protection to banks or special rights as lenders need to protect the interest of the depositors. The covenants also help banks bring a reckless borrower to table for negotiations. Banks have to introduce some binding covenants in the restructuring agreement for achieving the milestones. Some of the specific binding covenants could relate to minimum EBIDTA level, cash flow usage, debt equity ratio, future corporate or personal guarantees etc post restructuring. Banks should also have clauses for initiating change in the management and ownership to bring in strategic and financial partners to protect their interest or loan.
4) Independent validation
Any restructuring of loan means extension of tenure and foregoing a part or full interest payments for a defined period. In fact, every restructuring will be different in terms of the dole-outs or reliefs. In the past, the loan restructuring has come under the scanner of investigating agencies like CBI and CVC etc. A validation by an external agency or independent agency would be useful to get a stamp of approval. There are big auditing firms, turnaround agents and credit rating agencies that are well equipped to understand different industries and loan restructuring complexities. There are also investment bankers who can evaluate a restructuring proposal.
5) Strict post-implementation performance monitoring
The biggest weak link in any restructuring is the monitoring of the corporate account. The banking industry should learn a trick or two from the private equity industry, which in some cases tracks the investor companies' cash flow on a daily basis product and geography wise, and also provides inputs for strategic change or shifts. In large accounts, the burden of initiating the restructuring generally falls on the shoulders of the lead bank, which in most cases is the SBI or Punjab National Bank. The SBI also has limited capacity to deal with a large number of restructured accounts. The banks or the consortium will have to create a mechanism to actively monitor the performance of the restructured account and also take timely action for correction.