The 26 sectors identified by the five-member KV Kamath committee have to maintain the three threshold ratios - current ratio, debt servicing and debt coverage ratio - out of the five ratios for each year of the projections starting from the financial year 2021-22.
There are, however, sector-specific ranges for each financial parameters that will serve as boundary conditions for the resolution plan.
Take for instance, the committee has fixed the current ratio at more than 1 for the restructuring. Current ratio indicates the company's ability to pay short term debt and other liabilities which are due within a year's time.
Similarly, the debt service coverage ratio, which shows the available cash in the books to pay current debt, has to be more than 1.20 under the restructuring plan. The average debt service coverage ratio has been pegged at more than 1.2.
A debt coverage ratio of more than 1 is considered as good in the banking world. This shows that the company can easily service the loan obligation.
The committee has said that the restructured companies can meet the other two ratios - Debt to EBIDTA and outside liabilities to net worth by financial year 2022-23.
The debt to EBIDTA ratio, which is total debt divided by earning before interest, depreciation taxes and amortisation, has been fixed at an average of less than 5. This ratio indicates the cash position of a company to pay back its debt. Higher ratio means the company has more leverage.
For some sectors, this ratio has been set at a higher level. For example, this ratio is 6 for power, 9 for residential real estate, and 12 for commercial real estate.
The TOL/ Adjusted TNW, which is total debt to tangible net worth, indicates company's financial leverage over the total net worth of the company. This ratio is at an average of less than 4 for most of the sectors. However, the threshold is higher for power sector.
This ratio is arrived at by addition of long-term debt, short term debt, current liabilities and provisions along with deferred tax liability divided by tangible net worth net of the investments and loans in the group and outside entities.
These five ratios are set by the committee as part of the financial projections under the covid restructuring.
The committee has said that these sector-specific parameters may be considered as guidance for preparation of resolution plan. There are 26 sectors which includes power, construction, textiles, chemicals, aviation, mining, shipping, etc.
The committee has recommended that the resolution plan may be prepared based on the pre-COVID-19 operating and financial performance of the borrower and impact of COVID-19 on its operating and financial performance in first quarter (April-June) and second quarter (July-September) of 2020-21 to assess the cash-flows for FY21 and FY22 and subsequent years.
For sectors not covered by the committee, the banks or lenders can decide on their own.
A month ago, the RBI has appointed the Kamath committee to suggest sector-specific ranges for such financial parameters that will serve as boundary conditions for the resolution plan.
The resolution under this framework is extended only to borrowers having stress on account of COVID-19. In addition, only those borrowers which were classified as standard and with arrears less than 30 days as at March 1, 2020, are eligible under the framework.