Banking - Sector Update - KV Kamath Committee Recommendations - ICICI Securities

- The KV Kamath Committee has submitted its recommendations on financial parameters to be factored in for restructuring of Covid-19 corporate stress. The report indicates sector specific leverage and debt servicing metrics to be gauged by lenders in lieu of restructured accounts by FY22, FY23E. The committee will also validate resolution plans wherein aggregate exposure is Rs. 1500 crore or above

- On August 6, 2020, RBI announced a framework, which allowed lenders to restructure corporate and personal loans. As per these guidelines, only those borrowers would be eligible for resolution, which were classified as standard or SMA-0 (less than 30 days default) with the lending institution as on March 1, 2020

- The committee noted that ~70% of banking system credit was impacted by Covid-19 in varying degree. Thus, it has recommended financial parameters for restructuring for 26 sectors (~29% of banking system corporate loans) with its major focus on power, construction, iron & steel, roads, real estate, wholesale trading, textiles, consumer durables, aviation, logistics, hotels, restaurants & tourism, mining, which would require restructuring

- Resolution plan for borrowers has to comply with these recommendations by FY22, FY23E. In terms of sectors where sector-specific thresholds have not been specified, lending institutions shall make their own internal assessments related to total debt/EBITDA and TOL/ATNW. However, the DSCR and current ratio in all cases should be 1 and above while ADSCR shall be 1.2 and above. Maximum tenure of restructuring has been fixed at two years from the date of resolution

Our View

This move is positive for the banking sector as it enables restructuring of standard assets under stress amid Covid. Stricter norms for restructuring coupled with limiting the maximum restructuring tenure at two years for the residual tenure would ensure only eligible businesses get restructured. Apart from this, loan restructuring provides the required breather to borrowers, particularly from troubled sectors. For the first time the restructuring framework is on the basis of sectors and more detailed. Hence, the invocation should be more constructive. The banking sector has total Rs. 37 lakh crore exposure to these troubled sectors. Restructuring of around 15-20% range from these may not be ruled out, with PSU banks taking a larger share. We prefer large banks with low moratorium and limited exposure to troubled sectors, efficient business model, adequate provision buffer and capital for bolstering future balance sheet growth.

For details, click on the link below: https://www.icicidirect.com/mailimages/IDirect_Banking_SectorUpdate_Sep20.pdf

Source : Equity Bulls

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