'Sufficient comfort': State-owned lenders back RBI loan restructuring norms

Loan recast ratio guidelines will ensure strong companies make use of the restructuring window, says one executive

Executives of state-owned banks on Tuesday said the loan restructuring parameters for corporate accounts announced by the Reserve Bank of India (RBI) will be favourable to the financial sector as these will come to the aid of companies with strong financial background.

The financial parameters, they said, are relaxed, compared to what the lenders currently follow while restructuring loans.

“The RBI has announced relaxed ratios giving comfort to lenders to go for loan restructuring. Under normal circumstances, the range is higher. By and large, the recommendations are good and will be beneficial for accounts impacted by the Covid-19 pandemic,” said the chief executive of a large state-owned bank.

The executive said that normally, the current ratio for restructured accounts is kept at 1.33 per cent. This means if the assets of a firm are, say, Rs 100 then its liability should not be more than Rs 75. But the RBI has kept the current ratio at 1, meaning the liability can match the assets at Rs 100.

Similarly, the debt-to-equity ratio is usually kept at 3, but the RBI has asked banks to ensure those with higher levels of debt also get the benefit of restructuring in 15 of the 26 stressed sectors, ensuring firms can have higher outside liability.

Another bank executive, however, felt that the success of the scheme will depend on the recovery projections by companies.

“Everything will depend on assumptions. Let’s suppose an airline tells us that a good amount of passenger traffic will return by December, but that may not happen because of uncertainties related to Covid-19. Similar would be the case with the hospitality industry,” said the managing director and chief executive officer of a large public sector bank (PSB).

The executive said for some segments, such as toll road projects, where the cash flow scenario is evident, restructuring would not be difficult. “We will give a questionnaire to the customers and ask them to give a timeline of business recovery. The numbers will be put up before rating agencies and then the bankers will take a call,” the executive said.

He added that the RBI has given “sufficient comfort” to banks by prescribing ratios that will ensure “good and strong companies affected by the pandemic” make use of the restructuring window and not companies with inherent stress.

“The financial ratios required to be followed by companies are practical and sound, which is essential for good financial planning. The inclination of the RBI to cover good companies in terms of cash flow is important to avoid any asset quality review-like exercise in future for banks,” said the MD and CEO of a mid-sized PSB.

The RBI issued a circular on Monday, based on recommendations of an expert group led by veteran banker K V Kamath, outlining the financial parameters to deal with 26 sectors under stress due to the pandemic. Banks need to evaluate the restructuring proposal based on mandatory ratios, including the total outstanding liabilities/adjusted tangible net worth, total debt/Ebitda (earnings before interest, tax, depreciation, and amortisation), current ratio, debt service coverage ratio, and average debt service coverage ratio. The prescribed ratios have to be maintained by March 2022.

“There may be some issues in maintaining the debt-to-Ebitda ratio in the range of 4.5-5.5. Usually restructuring is done for companies with negative Ebitda. In this case, the Ebitda has to be positive so companies showing good financial results will be eligible,” said the bank executive cited above.