Debt-recast scheme: CEOs want simpler and corporate friendly norms

According to a Business Standard analysis, 40 per cent of corporate borrowing in the June quarter was accounted for by entities that either reported operating losses or poor interest coverage ratio
Indian companies under the moratorium have sought a less rigorous debt recast programme, saying the central bank’s move will bear fruit only if lenders collaborate and agree on the package negotiated by the regulator.

This comes a day after the Reserve Bank of India (RBI) announced the one-time debt restructuring scheme.

“The devil is in the detail. The other issue is on banks’ attitude, because some of them are hostile, obtuse, and inward-looking while others are forthcoming,” said an executive of a hotel company, which saw its cash flow reduce to zero in April.

On Thursday, the RBI allowed Indian firms hit by the pandemic to go for debt restructuring plans, and set up a panel led by K V Kamath to anchor the scheme.

“We feel the scheme should be simplified and inter-creditor agreement be signed by all banks. Those who do not sign it within 30 days of invocation of the resolution plan should make full provisions, instead of 20 per cent,” he added. The new version of the restructuring scheme — with several requirements on eligibility, provisioning, and loan extension — is more rigorous than the earlier one, said analysts.

According to a Business Standard analysis, 40 per cent of corporate borrowing in the June quarter was accounted for by entities that either reported operating losses or poor interest coverage ratio.

These firms had total borrowings of Rs 10.7 trillion at the end of March. Besides, nearly Rs 6 trillion worth of corporate borrowing was accounted for by firms that may slip into the ‘financially stressed’ category if demand recovery remains sub-par during H2FY21, showed the analysis.

This has made the debt recast package important for many entities, which were otherwise doing well before the pandemic.

Besides, CEOs said the debt restructuring should also be offered to the companies which fell into a financial problem before the Covid 19 as their present cash flows dependent on other companies. 

“Like the US, all companies should be offered money to the companies so as to protect jobs here. There should not be any distinction between companies as Covid 19 pandemic has hit all companies,” said promoter of a telecom infrastructure company. "The scheme will certainly revive growth if all stake holders come together to save the companies from falling into a financial crisis," said a CEO. Ït will take few more quarters for the economy to come back to growth path to the pre-Covid levels," he said. 

The debt restructuring is also expected to hit the balance sheets of the banks and analysts said the banking system would need to raise additional capital for catering to a post-COVID-19 economy by maintaining adequate buffers and dry powder.  “The RBI has been encouraging entities to raise capital to buffer their balance sheets. This has been evinced by several banks announcing capital raising plans,” said an analysis by Care ratings.



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