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One Time Restructuring

Now that RBI has come out with circular issuing directions to banks & institutions on the One Time Restructuring, accepting most of the recommendations of the KV Kamath committee the action will shift on the implementation of the much awaited restructuring plans (though we have seen the earlier versions viz. CDR, SDR,Flexible structuring, S4A etc.) as this presents a ray of hope to most of the businesses large or small affected across sectors.

Good thing about the RBI directions is to go beyond the traditionally measured ratios of Debt/Equity and Debt Service Cover Ratio to include the wider metric of Total Outside Liabilities/ Adjusted Tangible Networth. This takes into cognizance the importance of operational creditors/ other liabilities and investments made into subsidiaries/advances to group companies and finally focus on the right capital structure.

The inclusion of Total Debt/EBITDA which was also downplayed traditionally by Indian banks adds more teeth to the credit assessment. We have seen thousands of proposals over last few decades where this ratio was more like an academic one and the common questions from across all bankers was “What is the Debt Equity, What is Minimum DSCR and Average DSCR”

The not so good thing about the circular is the time frame allowed by RBI to achieve the financial metrics. RBI has stipulated the time frame of FY 22 for achieving metrics of Total Outside Liabilities/Adjusted Total Networth and Total DEBT/EBITDA as against the committee’s recommendation of FY 23. This is effectively ~12 months post implementation of the scheme. The point is with many sectors like Real Estate, Entertainment, Hospitality, commodities etc. severely impacted can we really expect them to achieve the threshold levels of the ratios by FY 22. This may result in an unsuccessful restructuring for many of the businesses resulting in a new wave of NPAs over next 3 years.

Is RBI trying to be too stringent on the restructuring scheme that it is reluctant to give one additional year for achieving the metrics. The need of the hour is more relaxations and time to resurrect the businesses instead of hurrying up on measuring the success of the structuring scheme

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