Banks need to invoke the resolution plan

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Even as the Reserve bank of India (RBI) has permitted lenders to classify COVID-affected borrowers into three categories — moderate, mild, and excessive — for restructuring, banks are not in favor of a uniform method for all of the categories. State Bank of India (SBI) MD CS Setty stated the procedure of restructuring for the three categories of debtors ideally must be different. “If a person needs slight restructuring, like an extension of the moratorium for some six months, it can be exempted from specific viability study, rating agency approval, etc.,” he said, adding that it would help to expedite the resolution method.

The Banks are also concerned about hurdles in the signing of inter-creditor agreements (ICAs) for the decision of debts. A senior bank official told FE that it would be a challenge to construct consensus among lenders in a short span. Banks need to invoke the resolution plan through December, and an inter-creditor pact needs to be signed for all debts, wherein there maybe a couple of lenders. Any lender who does not sign ICA will need to make 20% extra capital provisioning.

Soumitro Majumdar, the partner, J Sagar buddies, stated regulatory readability on ICA execution being mandatory, might nip lots of inter-creditor disputes in the bud, and compel focused efforts toward timely decision plan implementation.

RBI on Monday had specified five key ratios across 26 sectors, which lenders should follow at the same time as the restructuring of accounts impacted through Covid-19. The recommendations given by the KV Kamath Committee has specified five metrics that want to be taken into consideration even as choosing a recast plan. These total outstanding liabilities /adjusted tangible net worth, total debt/Ebitda, current ratio, debt service coverage ratio, and average debt service coverage ratio.

some specialists, however, believe that sector-wise differentiation may additionally reason greater harm than accurate. Sonam Chandwani, handling partner, KSK Legal stated, “A differentiated graded approach may cause implementation woes for financial institutions and deprive the residual sectors, hit by the pandemic, from availing a liquidity shot thereby putting their survival at stake.” The circular might be difficult to implement on paper and may even leave scope for manipulation, she delivered.

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