Pitfalls and impracticalities of KV Kamath Committee recommendations

The recently announced parameters by the KV Kamath Committee for companies and businesses to be eligible under new resolution framework announced by the Reserve Bank of India (RBI) has some obvious pitfalls and impracticalities.

The first problem with the committee recommendations that many points out is their one-size-fits-all approach. Some experts point out that the recommendations have ignored factors like size, geography, sub-sectors while prescribing the parameters. Besides, some ratios prescribed by the committee may not at all be relevant for certain kind of situations. For example, the current ratio parameter may not be relevant for restructuring long-term debts.

The Second point raised by many is the very less time available to achieve and maintain the prescribed thresholds for different parameters. The last date for submission of resolution plan is 31 December and the ratios have to be maintained as recommended by the expert committee from 31 March 2022 itself. This means the entities desiring to take benefit of the scheme may effectively have only 15 months to improve the ratios.

This, say experts, is an extremely aggressive target considering the extent of impact of COVID-19 and the continuing uncertainty about the recovery. They believe sectors which are discretionary in nature like hotels and tourism may take much longer to recover to meet these targets in such short period.

With no vaccination and medicine at sight for Covid-19 in immediate future, and the threat of more localized lockdowns pretty high, it is difficult for it is difficult to expect even reasonable certainty in the cash flow projections in view of continued uncertainty.

Lenders have their own internal guidelines and parameters for restructuring debt. Banks may face in implementing a whole new set of parameters for restructuring. This can also disrupt their internal control systems.

Another issue that arises due to implementation of the new restructuring framework is that for these two years’ banks’ accounts wont reflect the true picture of its credit quality as at present banks are not required to disclose the extent of restructuring and likely loss there. It is to be seen if this may change in the near future as seen even with moratorium, where bank-wise information started becoming available after a while. Experts say that banks will have to put in place information disclosure standards allowing financial markets to continuously price such information.

The expert committee under the former ICICI Bank Chairman KV Kamath set up by the RBI has identified 29 sectors which are impacted by Covid-19 eligible for benefits under the new resolution framework announced by the central bank in August 2020.

The committee has identified four financial parameters (ratios) – Total outside Liability/Adjusted Tangible Net Worth (TOL / Adjusted TNW), Total Debt / EBIDTA, Current Ratio (Current Asset/Current Liabilities), Debt Service Coverage Ratio (DSCR) and Average Debt Service Coverage Ratio (ADSCR) – and thresholds for each sectors to be eligible for restructuring of their debts.

The committee has noted that close to 72% of the banks’ total outstanding loan has been impacted by the Covid-19. It says that Rs 16 lakh crore or 30% of the total banks’ outstanding loans have been freshly impacted due to Covid-19 while Rs 22.20 lakh crore or 42% of the banks’ outstanding loans which were stressed earlier as well have also been impacted by the spread of Covid-19 infection.