Creditors will have to consider financial parameters consisting of liquidity and debt-servicing ratios at the same time as getting ready a restructuring plan for loan accounts which have become worse due to the coronavirus pandemic, the Reserve Bank of India said following the recommendations of an external panel.
The Central Bank recognized 26 sectors affected by the pandemic inclusive of auto, aviation, and tourism, which may be provided a resolution subject to criteria along with debt-coverage ratio, outstanding liabilities, and net worth at pre-Covid levels.
In an announcement, RbI stated that compliance regarding meeting the agreed ratios needs to be monitored as financial covenants on an ongoing basis and during the next credit reviews. This sort of breach no longer rectified within a reasonable duration, in terms of the loan settlement, will be considered as monetary difficulty.
India’s Central Bank had allowed banks to alter the terms of loans for cash-strapped borrowers hit by the fallout of the pandemic, which includes longer repayment times and a prolonged freeze on payments.
The regulator last month gave creditors the power to restructure certain loans, replacing a six-month moratorium that ended on Aug. 31. only loans that were performing as of March will be eligible for restructuring.
India ratings, the local arm of Fitch, estimates that 8% of outstanding loans might be restructured. As much as half of India’s loans could become being classified as non-performing debt, according to Standard Chartered Plc, which additionally expects problem loans to rise to 17-19% through March 2021. The central bank, in the meantime, expects the bad mortgage ratio to rise to 12.5% by March, up from 8.5% a year earlier, and the highest level since 2000.
Siddharth Purohit, an analyst at SMC Global Securities Ltd. said that the financial parameters like debt servicing ratio, a net worth of a company pre-Covid are the reasonable matrix to ensure that best the genuine companies which had been affected by the pandemic could be eligible for the debt restructuring. This won’t give an escape clause to companies which have been already in trouble before Covid. In that sense, the norms are easy, reasonable and could help the companies in real trouble.
