Banks must ensure that restructured loans meet specific financial parameters by March 2022, a panel set up by RBI to suggest debt recast rules said, in a signal that it expects things to improve in less than two years from now.
In its report, the five-member panel led by K.V. Kamath identified five financial parameters to gauge the health of sectors facing difficulties. These include total outside liabilities to adjusted tangible networth, total debt to earnings before interest, taxes, depreciation, and amortization (Ebitda), debt service coverage ratio (DSCR), current ratio and average debt service coverage ratio (ADSCR).
The panel submitted its report to RBI on 4 September, and its recommendations have been broadly accepted.
RBI has allowed greater leeway to the real estate sector with the highest debt to Ebitda ratio permissible among the 26 sectors it has identified. The debt to Ebitda ratio indicates how well a company can service its loans and other liabilities, with a lower ratio implying better capability.
While the ratio has been kept at less than or equal to nine for residential real estate, it has been pegged at less than or equal to 12 for commercial real estate. This gives the sector more headroom in terms of financial performance and the projections thereof. However, other ratios such as adjusted tangible net worth, current ratio and debt service coverage ratio have also been specified for the realty sector, which are more or less on a par with other industries.
{{/usCountry}}While the ratio has been kept at less than or equal to nine for residential real estate, it has been pegged at less than or equal to 12 for commercial real estate. This gives the sector more headroom in terms of financial performance and the projections thereof. However, other ratios such as adjusted tangible net worth, current ratio and debt service coverage ratio have also been specified for the realty sector, which are more or less on a par with other industries.
{{/usCountry}}“Right now, in the real estate industry, there is no equity coming and just because your debt to equity is higher than others, one cannot throw away these assets. They are hard and tangible assets unlike many other sectors and, therefore, their debt to Ebitda is higher,” said Nirmal Gangwal, founder and chairman of Brescon and Allied Partners.
RBI said in a circular accompanying the recommendations that banks are expected to comply with adjusted tangible net worth agreed as per the resolution plan at the time of implementation itself.
“Nevertheless, in all cases, this ratio shall have to be maintained as per the resolution plan by 31 March 2022 and on an ongoing basis thereafter. However, wherever the resolution plan envisages equity infusion, the same may be suitably phased-in over this period. All other key ratios shall have to be maintained as per the resolution plan by 31 March 2022 and on an ongoing basis thereafter,” the Reserve Bank said.