‘Lenders, firms will need to adhere to timelines’

The committee has suggested March 2022 as the deadline for achieving the financial parameters. Can you explain the thought process behind this cut-off date?

Basically, you are doing a cash flow analysis for the period of the loan. You are actually projecting the P&L account and based on that how the numbers flow over the next 5-7 years. If you are taking a fresh set of projections, take a debt service coverage ratio, can it be above 1? As a banker, I would say at any point in time, if you have debt to service, that number has to be above 1, unless you are bringing that debt to 0. At any point, if there is repayment due, that number has to be above 1. What we are saying is, if there is debt to pay, you have enough cash flowing into business to pay back. We recognize there is pain. By 2022, you should come back to normal to pay. Then comes the solvency ratio, which can get corrected by earnings profit, which goes to reserve. Networth increases and your ratio increases. The second way is bringing in new equity. If you are bringing in new equity, it can be done by March 2022. Within this, the bank and the client can work out what is the schedule of repayment. To me as a banker having worked on cash flow, this period is enough to structure the cash flows.

Banks have time till December to decide on a resolution plan and another six months to implement that. Does it mean that they have only nine months to comply?

The timelines subtly put pressure on the system to resolve quickly. Resolving quickly is the best for my client and for me as a banker. This is the boundary condition put in by RBI. That pushes the system for resolution by this fiscal. On moratorium, I can create a moratorium by extending the payment schedule, by rescheduling interest payment. As a banker, I have the discretion available to decide the repayment. If I were a borrower, I would say I need to do it early.

How much of loans do you expect to be restructured?

The impact is 25% in terms of top line, consistent to what we have seen in the GDP. Top line has come down by 20-25% for sectors that we have studied. How much is impacted is dependent on factors such as how quickly have they recovered. However, we have seen the eligibility part. Assuming this is the eligible sector and if all have been impacted, (we need to understand) what needs to be done to get them back to health. I think we will have systemic clarity over the next eight weeks.

Last time, at least 50% of the companies failed under the corporate debt restructuring mechanism. How hopeful are you this time with better entry barriers?

This time, these companies are not sick. In all the other restructuring, they were sick. My experience is that earlier, there was time delay. Nothing was done at speed. This time around, the construct of the whole circular is such that time is of essence. If I go back, in 2000 when we looked at restructuring, debt-equity of companies was 3.8 to 4. In 2010 it was 2. This time around, when I looked at companies, they are fairly deleveraged, not leveraged more than 1.

By setting March 2022 as deadline for meeting financial parameters, are you expecting the economy to also turn around by that time?

Every 4-6 weeks, I have will have to reassess the state of the economy. From where I was in April, to today, there is a dramatic improvement in my own assessment of when we will be out of it (difficulties). By 2021-22, we should be back on our feet.

gopika.g@livemint.com