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Kamath's Committee Wants 26 Stressed Sectors To Maintain 3 Ratios


KV Kamath resolution for loan restructuring has been approved by the RBI and for the 26 stressed sectors the committee has identified 5 ratios of which 3 threshold ratios are to be maintained namely current ratio, debt coverage ratio and debt servicing for each year of the projections starting from FY2022.


Kamath's Committee Wants 26 Stressed Sectors To Maintain 3 Ratios

But sector-wise there is a range for each financial measure that will be a threshold for the resolution plan. For the restructuring, the committee has fixed the current ratio at over 1. Current ratio is the company's ability to pay short term debt that is due in one year's time. Also, similarly through the cash in the book the company's ability to pay off current debt has to be over 1.2 under the re-structuring plan. The average debt service coverage ratio has been fixed at over 1.2.

A debt coverage ratio of more than 1 is considered as good in the banking world. This shows that the company can easily service the loan obligation.

Also the restructured organizations can also meet 2 other ratios namely Debt to EBIDTA and outside liabilities to net worth by financial year 2022-23. This is indicative of the company's financial position (in cash) and its ability to pay back its debt.

This ratio is set at 6 for power, 9 for residential real estate and 12 for commercial real estate.

The TOL/ Adjusted TNW, which is total debt to tangible net worth, indicates company's financial leverage over the total net worth of the company. This is less than 4 for most sectors but higher for the power sector.

These parameters can be considered for preparation of the financial preparation.

Read more about: loan coronavirus
Story first published: Tuesday, September 8, 2020, 7:44 [IST]
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