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KV Kamath Panel Identifies 26 Sectors For Debt Resolution affected due to COVID-19 - Posted on: 08-09-2020

Under the proposed guidelines, lenders can also consider their own financial parameters to decide on resolution plans for their customers.

The Reserve Bank of India (RBI) said on Monday that it had broadly accepted recommendations made by a committee on loans restructuring for COVID-19-affected businesses. The RBI-appointed panel, under eminent banker KV Kamath, recommended five financial ratios for 26 sectors - including aviation, construction, power, real estate and automobiles - which could be taken into account by banks while finalising their resolution plans for borrowers. The development comes at a time when the central bank has warned that bad loans in the country's banking system can soar to at least 12.5 per cent by March 2021, from 8.5 per cent at the end of March this year, due to the impact of the coronavirus pandemic.

Here are the things to know:

  1. The sectors include aviation, hospitality and real estate, which are among the worst hit spaces due to the impact of COVID-19 and the related restrictions.

  2. The five financial ratios include parameters such as total debt, debt service coverage ratio, which determines a company's ability to clear its debt using operating income.

  3. The panel recommended specific levels to determine eligible businesses in the sectors, which, "may require some time to restore their position to pre-COVID-19 levels", said the report, submitted to the RBI on September 4.

  4. The resolution plan will apply only to borrowers classified as standard, and with arrears less than 30 days, as of March 1, 2020, the central bank said.

  5. Banks will make their own assessment in case of sectors for which the levels have not been specified, the RBI said.  

  6. The committee selected these parameters after talks with rating agencies and lending institutions, and said lenders can also consider their own financial parameters to decide on resolution plans for their customers. 

  7. Lenders have been directed to consider the pre-COVID-19 financial performance of the company for considering the resolution plan.

  8. They will need to make an additional 10 per cent  provisioning for the loan accounts that are being restructured.

  9. The RBI had formed the committee chaired by Mr Kamath, the former head of the New Development Bank, last month.

  10. The primary task of the committee was to identify the sectors worst hit by COVID-19, and suggest a plan to provide loan restructuring to the impacted businesses.