The Reserve Bank of India-appointed (RBI-appointed) expert committee on a resolution framework for bank loans stressed on account of the pandemic has outlined parameters to deal with 26 sectors buffeted by Covid-19.

The findings of the committee have been accepted by the RBI, which on Monday issued a circular detailing the financial parameters to be followed by lending institutions.

According to the much-awaited report, the pandemic affected retail and wholesale trade, roads, textiles, and engineering the hardest, while sectors that were already under stress, such as non-banking financial companies (NBFC), power, steel, and real estate, piled up more misery due to the crisis.

The committee identified almost all major sectors including auto, real estate, and aviation. It also found areas such as agriculture, food, pharma, and IT, among a few others, that remained mostly unaffected.

The panel, headed by former chief of New Development Bank K V Kamath, did not specify the amount that would need restructuring, but gave its recommendations basing itself on parameters after discussion with stakeholders and rating agencies, and going through financial reports of companies as well as some of those of the RBI.

But bankers who studied the report said roughly Rs 4-4.5 trillion of loans would need to be recast even after taking into consideration the economic recovery in the coming months.

The committee identified a few mandatory financial ratios, but left it to banks to work out their own extra criteria.

The mandatory ratios that should be used for any restructuring are total outstanding liabilities/adjusted tangible networth, total debt/Ebitda (earnings before interest, depreciation, tax, and amortisation), the current ratio, the debt service coverage ratio, and the average debt service coverage ratio.

The RBI has made signing the inter-creditor agreement (ICA) mandatory in all cases involving multiple lending institutions, where the resolution process is invoked.

All banks have started working on identifying stressed companies, and now can fine-tune and filter the exercise further with the mandatory ratios.

However, experts say not all companies, even if they are part of the same sector, can be evaluated based on a common parameter.

Two points need particularly closer attention, experts say. Banks are expected to ensure compliance with the ratio total outside liability/adjusted tangible net worth (TOL/adjusted TNW) agreed in accordance with the resolution plan at the time of implementation itself. This ratio is essentially the addition of long-term debt, short-term debt, current liabilities, and provisions, along with deferred tax liabilities divided by tangible net worth net of the investments and loans in the group and outside entities.

In all cases, this ratio has to be maintained in accordance with the resolution plan by March 31, 2022, and on a continuous basis thereafter. However, wherever the resolution plan envisages equity infusion, it may be suitably phased over this period. All other key ratios will have to be maintained in accordance with the resolution plan by March 31, 2022, and on an ongoing basis thereafter.

“The compliance in regard to meeting the agreed ratios must be monitored as financial covenants on an ongoing basis, and during subsequent credit reviews. Any such breach not rectified within a reasonable period, in terms of the loan contract, will be considered as financial difficulty,” a statement by the RBI said.

Jyoti Prakash Gadia, managing director at Resurgent India, said: “Prescribing a financial ratio with a one-size-fits-all approach, irrespective of geography and the size of the firm, is not a feasible approach that the RBI has adopted. Also, the RBI needs to keep in mind that each borrower is unique and when it doesn’t prescribe financial parameters for sanctioning loans, it doesn’t make sense to do so for understanding the viability of the borrowers.”

The committee further suggested that in segments where the sector-specific thresholds had not been specified, lending institutions would make their own assessments regarding TOL/ATNW and total debt/Ebitda.