RBI Outlines Sector-Specific Thresholds for 26 Sectors on 'Resolution Plan' Suggestions by KV Kamath Committee

Accepting the recommendations submitted by the KV Kamath Committee on 'Resolution Framework for Covid-19 related Stress' on September 4, the Reserve Bank of India (RBI) on September 8 issued a follow-up circular specifying five specific financial ratios and the sector-specific thresholds for each ratio in respect of 26 sectors to be taken into account while finalizing the resolution plans.

The committee in its report submitted on September 4, 2020, recommended financial ratios of 26 sectors which could be factored by lending institutions while finalizing a resolution plan for a borrower.

The RBI follow-up circular added, "In respect of other sectors where certain ratios have not been specified, the lenders shall make their own assessment keeping in view the contours of the circular dated August 6, 2020, and the follow-up circular issued." 

The five-member expert committee was formed by the Reserve Bank of India (RBI) on August 7, 2020, under the chairmanship of former ICICI Bank CEO KV Kamath to make recommendations on the required financial parameters to be factored in the resolution plans under the 'Resolution Framework for Covid19-related Stress' along with sector-specific benchmark ranges for such parameters. Other members of the committee are former State Bank of India executive Diwakar Gupta, current Canara Bank chairman TN Manoharan, consultant Ashvin Parekh and Indian Banks' Association (IBA) CEO Sunil Mehta who was also a secretary to the committee.

In its report, the five-member committee said the following sectors will need restructuring. These include sectors like power, construction, iron and steel, roads, real estate, wholesale trading, textiles, chemicals, cement, consumer durables, aviation, logistics, hotels, restaurants and tourism, mining, non-ferrous metals, auto manufacturing, auto dealerships, auto components, pharmaceutical manufacturing, corporate retail outlets, port and port services, shipping, building materials and sugar.

The Committee has recommended five financial parameters that include aspects related to leverage, liquidity and debt serviceability among others. The committee selected five financial parameters where the threshold has to be recommended for each identified sectors in the terms of aspects related to leverage, liquidity, debt serviceability etc.

The selected parameters include 'Total Outside Liability / Adjusted Tangible Net Worth, Total Debt / EBIDTA, Current Ratio, Debt Service Coverage Ratio and Average Debt Service Coverage Ratio.

It had asked the panel to recommend a list of financial parameters, including leverage, liquidity, and debt serviceability, to decide on the resolution plan. The committee will also vet the resolution plans for all the accounts where the exposure is more than Rs 1,500 crore. The term of the committee has been extended till June 30 2021.