View: The key to RBI's long delayed resolution framework lies in its implementation

By Dr Ashok Haldia
RBI has announced a resolution framework allowing one-time restructuring of loans to corporates under financial stress due to Covid -19 in the specified 26 sectors without classifying them as NPAs.
The framework was much needed and has in fact been delayed by at least 3 months as from the beginning , it was evident that Covid-19 would have devastating effect on the economy and would also cripple the operations and viability of the industry. Quarter 1 FY 2021 has seen fall in net profits of top 1670 companies by more than 50% and loans of more than Rs 15 lakh crores to industry are in stress.

The Covid -19 and the lockdown that followed was a force- majure event requiring a resolution plan for relief , concessions and additional financing support from the lenders in order to helps the borrowers to tied down liquidity and solvency problems .Lenders themselves needed regulatory forbearance to incentivize them to nurture stressed accounts

RBI has provided a resolution framework for addressing financial stress for borrowers across 26 specified sectors subject to adherence to certain financial parameters with sector specific benchmark ranges.These benchmark ranges are floor levels and are quite reasonable for preparation of pragmatic resolution plan to deal with pandemic situation.For example , framework lays floor of 1:1 for debt service coverage ratio (DSCR),a measure of ability to repay debt obligations , which is bare minimum and so are the other ratios with time frame where ever needed for maintaining these.

Success of a resolution plan would however depend upon quality of evaluation of pre-Covid-19 performance of the borrower and impact of Covid-19 on its performance and , of cash flow in subsequent years as a base for a holistic and workable solution , and its expeditious implementation with in 90 days .

Experience in regard to restructuring of loans to tide over the impact of the global financial crisis,2008 has however been far from being satisfactory.The aggregate amount of standard loans restructured were twice the amount of NPAs and more than 30 % of restructured loans turned non-performing later .Subsequent restructuring of earlier restructured loans permitted under schemes like CDR,SDR,S4 added to already mounting NPAs in the banking sector.Restructuring exercise under the aforesaid schemes was often resorted to present unviable accounts as viable through over -optimistic financial projections or financial engineering for getting cover of regulatory forbearance or for ever-greening of loans.

Most of the lenders need skill sets requisite for drawing a resolution plans in a short time period taking in to account a pandemic like unique situation particularly for borrowers having moderate or severe impact of Covid-19.Immediate measures for capacity building in this respect is highly required to prevent surge of bad restructured loans in future.

The focus of the RBI frame work is on standard accounts under financial stress due to Covid -19 in 26 specified sector. This may lead to lenders aversion to support corporates not covered under the framework. These include corporates whose financial stress before Covid-19 has been further aggravated because of Covid-19, or corporates in sectors other than those specified , or corporates which do not meet the financial parameters.

Large scale closure or bankruptcy or liquidation stare at these corporates as the indian economy is expected to shrink by about 10% in FY 2021.The lenders of these corporates may have limited options for recovery of their loans or for resolution of stress.At a time when industrial and financial sectors are reeling under liquidity constraints , stressed projects may also not find investors.The IBC Eco system would be under severe stress with surge in new cases once the suspension on IBC is lifted ,and may require strengthening.RBI should enable restructuring of loans not covered by the resolution framework but otherwise deserving subject to satisfactory viability rating by external rating agency as was stipulated in the earlier schemes

The banking sector struggled hard for almost three years till 2019 to restore some sanity in its financial health . It would again be struggling and possibly harder for restricting and overcoming deleterious effects of the pandemic ,over the next 2-3 years. The resolution framework would need its efficacious implementation.Other-wise ,the framework may not be able to check likely spike in the NPAs which as per the recent Financial Stability Report of RBI , are expected to rise to 14.5% by March 2021 up from 8.5% in March 2021.

[The author is former MD and CEO, PTC India Financial Services Ltd and Adjunct Professor IMT Ghaziabad.]