India: One Time Restructuring Framework For Stressed Borrowers

Parameter

Brief Description

26 (twenty-six) specified sectors

Power, construction, iron and steel manufacturing, roads, real estate, trading wholesale, textiles, chemicals, consumer durables/FMCG, non-ferrous metals, pharma, logistics, gems and jewelry, cement, auto components, hotels, mining, plastic products manufacturing, automobile manufacturing, auto dealership, aviation, sugar, port and port services, shipping, building materials, and corporate retail outlets.

5 (five) key financial ratios of borrowers

The 5 (five) key ratios for 26 (twenty-six) sectors that have been announced based on leverage, liquidity and debt serviceability are: Total outstanding liability (TOL) divided by adjusted tangible net worth (Adjusted TNW), total debt divided by EBITDA, debt service coverage ratio (DSCR), average DSCR and current ratio.

Non-specified sectors

Lenders to make own assessment of parameters for other non-specified sectors.

Basis for projected cashflows

The resolution plan must be based on the borrower's pre-COVID operating and financial performance, and the impact of COVID-19 on its operating and financial performance in Q1 and Q2FY21, to assess the cash-flows for FY21/FY22 and subsequent years.

Check on ratios

Key financial ratios to be complied on an ongoing basis and unrectified breach to be considered as financial difficulty.

Inter creditor agreements

Encouragement for signing of inter credit agreements.

Current ratio and debt service coverage ratio for sectors

To be >=1 and >=1.2 respectively in all cases, if not specified otherwise.

Issue

Clarifications

Eligibility for resolution

• Debt availed after March 01, 2020, will be eligible for restructuring. 
• Actual debt that may be considered for resolution will be the outstanding as on the date of invocation, i.e., the date on which the borrower and the lender decide to restructure the account. However, the borrower's account should have been classified as standard, but not in default for more than 30 (thirty) days as on March 01, 2020. 
• Debt overdue by more than 30 (thirty) days as on March 01, 2020 and subsequently regularised will not be eligible for restructuring. 
• For borrowers who are ineligible for resolution under the OTR Framework, the existing instructions under various circulars and guidelines issued by the RBI as applicable will still be in force.

Applicability of OTR Framework for all

exposures

• The OTR Framework can be invoked for resolution of all exposures of lenders to the eligible borrowers, including investment exposures which are credit substitutes, such as corporate bonds, commercial papers, etc.

Kamath Committee approval and applicability of financial parameters

• Financial parameters as per the Kamath Committee Report will be applicable to all eligible exposures of lenders, except for personal loans.
• Resolution plans of all accounts, where the aggregate exposure of the lender at the time of invocation of the resolution process is at least INR 1,500 crore, will be approved by the Kamath Committee.
• For any sector which is not covered by the Kamath Committee, lenders will make their own internal assessments regarding the TOL divided by Adjusted TNW, total debt divided by EBITDA, DSCR, average DSCR and current ratio.

Independent credit evaluation

• Accounts where the aggregate exposure of the lender at the time of invoking the resolution process is at least INR 100 crore will require a credit opinion of 'RP4' or better for the residual debt.

Classification of personal loans

• Loans availed by individuals for business purposes or loans availed by individuals and non-individual entities together as co-borrowers will not qualify as personal loans. Resolution for such loans will be in accordance with the process permitted for commercial/ business loans under the OTR Framework.

Eligibility of farm credits; joint liability group, selfhelp group and microfinance institution loans

• Loans given to farmer households by all lenders, including NBFCs, are eligible for resolution, unless covered by the specific exclusions as listed in the OTR Framework.
• Farm credit exposures of all lenders, including NBFCs, are excluded from the scope of the OTR Framework. However, loans to allied activities, such as dairy, fishery, animal husbandry, poultry, bee-keeping, and sericulture are eligible for resolution under the OTR Framework.
• All microfinance institution, joint liability group and self-help group loans meeting the basic eligibility criteria are eligible for resolution, unless covered by the specific exclusions as listed in the OTR Framework.

Specificities for real estate sector

• To ease the burden on the real estate sector and to ensure that projects are not delayed due to defaults by the parent entity, for borrowers having both residential and commercial real estate business, financial parameters for resolution plans may be applied at the project level instead of the entity level.
• The RBI has further clarified that the requirement of an inter-creditor agreement (ICA) in respect of the entity to which lenders have exposures is a basic feature of the Resolution Framework, and is consequently applicable under the OTR Framework, including by designing different resolution approaches for different projects under the same borrower within an ICA.
• Similarly, apart from the escrow account required to be set up at the legal entity level as required by the OTR Framework, there is no prohibition for setting up additional separate escrow accounts at each project level, if required by the lenders.

Restructuring of under implementation projects

• Restructuring of under implementation projects involving deferment of date for commencement of commercial operations (DCCO) are excluded from the purview of the OTR Framework.