The Reserve Bank of India (“RBI”) on 07th September 2020 issued a circular directed to all Banks and NBFCs wherein the RBI has issued some key ratios which all the lending institutions shall consider while finalizing the resolution plans in respect of eligible borrowers.
The Key Ratios defined are:
- Total Outside Liabilities/Adjusted Tangible Net Worth
- Total Debt/EBITDA
- Current Ratio
- Debt Service Coverage Ratio
- Average Debt Service Coverage Ratio
Sector-specific ratio thresholds (ceilings or floors, as applicable) have also been outlined by RBI for about 26 sectors.
Sectors for which thresholds have not been specified, lending institutions are advised to make their own assessments regarding “Total Outside Liabilities/Adjusted Tangible Net Worth” and “Total Debt/EBITDA”. However, the Current Ratio” and “Debt Service Coverage Ratio” shall, in all cases, be 1.0 and above, and “Average Debt Service Coverage Ratio” shall be 1.2 and above. In spite of providing the specific ratios, lending institutions are advised that the resolution plans shall take into account the pre-COVID-19 operating and financial performance of the borrower and impact of Covid-19 on its operating and financial performance at the time of finalizing the resolution plan, to assess the cash flows in subsequent years, while stipulating appropriate ratios in each case.
Lending institutions have also been allowed to consider other financial parameters along with these key ratios and sector-specific thresholds.
Lending institutions are expected to ensure compliance with TOL/ATNW agreed as per the resolution plan at the time of implementation itself.
To read the full detail, please find the link to the RBI Circular.