One-time Loan Recast: Tricky Road Lies Ahead For Kamath Panel, Say Experts

The Reserve Bank of India (RBI) on Friday constituted the K V Kamath committee on one-time loan restructuring, but experts say it won’t be easy for the panel to negotiate the rocky road that led to the failure of all such efforts in the past.

The scheme has been welcomed by former central bankers known for their conservatism. For example, recently retired RBI deputy governor N S Vishwanathan, one of the key architects of the original June 7 resolution circular, told Business Standard that he “fully” endorsed the resolution process declared by the RBI.

In recent days, Vishwanathan advocated tightly-held restructuring processes if needed, and was known for bringing in the one-day default norm (February 12, 2018) by which companies could be termed defaulter and sent down for bankruptcy proceedings if they delayed paying even for a day.

He said his idea of resolution during these Covid times would be very similar.

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Apart from veteran banker Kamath, other members of the committee will be former State Bank of India managing director Diwakar Gupta, who would join effective September 1, after the completion of his term as vice-president, Asian Development Bank; T N Manoharan, effective August 14 after completing his term as chairman, Canara Bank; banking expert Ashvin Parekh; and Sunil Mehta, chief executive officer of the Indian Banks’ Association (IBA) as the member-secretary.

The committee can consult or invite any other person and will recommend on the financial parameters to be factored in, with sector-specific benchmarks for such parameters. It will undertake the process validation for the resolution plans, “without going into the commercial aspects”, of all accounts with aggregate exposure of Rs 1,500 crore and above at the time of invocation, the RBI said. "The Committee shall submit its recommendations on the financial parameters to the Reserve Bank which, in turn, shall notify the same along with modifications, if any, in 30 days," the central bank said. Experts say there is just not enough time. With one member joining after September 1, and the central bank taking as long as 30 days to notify, banks will have very little time to complete the first leg of restructuring by December 31. Experts say the process could be hurried even as the committee may vet accounts on a sector-specific basis, and not go deep into the books.

The pitfalls

The sheer number of firms that would line up for restructuring would be mind-boggling. A Business Standard analysis of the companies that have announced their results for the April-June quarter indicates that companies which either reported operating losses or a poor interest coverage ratio (ICR) accounted for nearly 45 per cent of corporate borrowing. All these firms would definitely want a relief.

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Mrutyunjay Mahapatra, MD and CEO of the erstwhile Syndicate Bank, said the most crucial safeguard for banks would be to look out for possible “ever-greening” of loans in the past two quarters prior to March 1, when the account had to be “standard” according to the RBI guidelines.

“A loan account shows signs of stress two quarters prior to becoming ‘default’. This is typically when ‘ever-greening’ happen. So, there should be clear parameters to monitor the past two quarters of loan accounts. It should be subject to independent scrutiny,” Mahapatra said. He added banks needed to examine the intra-group leverage of the companies. And then, there is the potential fallout on bankers if it turns out some accounts have improperly used the mechanism. In a note to the Parliamentary Estimates Committee on bank non-performing assets in September 2018, former RBI governor Raghuram Rajan had said that the “risk-averse bankers, seeing the arrests of some of their colleagues, are simply not willing to take the write-downs and push a restructuring to conclusion, without the process being blessed by the courts or eminent individuals”, leading to an “endless” delay in the process. While restructuring is now time-bound and must end by June, experts say it would take many months beyond June before the banking system can be said to be breathing a sigh of relief.

The restructured companies have to service their debt within 30 days for the first 10 per cent of the loans at least. If not, they would be declared defaulters and bankruptcy proceedings could kick in. A significant number of companies could slip into that, fear experts.

“It’s important to distinguish between a legacy problem and a problem that is Covid-related. Many units in India were having problems even prior to Covid, and so, March 1 is a good date from that angle,” said a former deputy governor of the RBI.

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Another senior banker said the problem with the previous restructuring schemes was that the banks didn’t have a structure in place to do a thorough review of the proposals. “So, if one bank rejected a proposal of the borrower, it became easier for the borrower to convince the other bank and get acceptance,” the person said.

He added that risk management and economic planning needed to be incorporated in the bank’s organisational structure as restructuring would require monitoring the borrower’s accounts for up to two years. The focus should be on capacity building for banks, apart from setting parameters for loan restructuring, the person added.

The former deputy governor agrees with this assessment.

Bankers can’t run companies

“The biggest problem with any restructuring plan is how I predict what my top line and bottom line are going to be,” said the former deputy governor. Banks engaged in the erstwhile mechanism of corporate debt restructuring (CDR) had no clue, so they used to “cook up things. They used to put their own revenue assessments and a discounting rate of their own discretion to calculate the net present value of their sacrifice”, said the former RBI official.

“There is no way even now banks will be able to calculate that and that is where the Kamath panel can set up the entry points and draw a benchmark based on sectors.” The panel doesn't need to look at individual accounts to give their approval of a resolution, but can set rules for sectors that were hit the hardest due to the pandemic and need restructuring, such as aviation, tourism, hospitality, the person said.

It is also important to judge that not every company will need restructuring even as all would line up for one. Banks and the Kamath committee have to be on their guard to avoid those.

“There should not be any rosy predictions in these plans. When you draw up a restructuring plan, you have to look at the debt service coverage ratios, depending upon what your sales and margins at Ebitda (earnings before interest, depreciation, tax and amortisation) level. You are trying to see if the interest and instalment are serviceable, and probably give some fresh loans which also have to be serviced,” said another former RBI deputy governor.

If there is any need to write down the equity, and to bring in more capital, that should also be part of the plan, and there should be provisions for additional collaterals for additional lending. Experts also say if the restructuring fails, these companies can’t be dragged to the insolvency tribunal. There will be not enough buyers, banks will have to take huge haircuts, and bad debts will pile up.

“If the firms go down, banks will. And the worrying part is that the 10 per cent provision is just not enough to protect the system even as the governor’s primary concern is safeguarding the banking system and not necessarily the companies,” said a former deputy governor quoted above.