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KV Kamath Committee

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September 10, 2020

Why in news?

The KV Kamath committee was set up by the Reserve Bank of India (RBI).

What is the purpose of the committee?

  • The committee was set up to look into the restructuring needs of large borrowers hit by Covid.
  • The panel was set up to deal with accounts where the aggregate exposure of the lending institutions at the time of invocation of the resolution process is ₹1,500 crore and above.

What are the findings?

  • The committee has identified 26 vulnerable sectors and, the specific financial frailties of each.
  • The sectors identified cover much of the manufacturing and infrastructure universe, besides retail outlets, hotels and tourism.

What did the panel say?

  • The panel spelt out sector-wise thresholds with respect to EBITDA, debt service coverage, current assets and liabilities, total outside liability vis-a-vis adjusted tangible net worth.
  • It has spelt out clear restructuring guidelines for banks to ensure that errors with respect to corporate debt restructuring don’t recur.
  • Restructuring has seen many avatars over the last decade, be it 5/25 (scheme for infrastructure assets) and S4A, which did not succeed.
  • The specific crisis arising out of Covid necessitated a response for large players.
  • This supplements the earlier efforts to boost the MSME sector as well as units where the aggregate exposure exceeded ₹100 crore.

What are the reliefs?

  • MSMEs have received liquidity and solvency packages since September 2019.
  • The June 2019 RBI circular addresses the ‘resolution plan’ modalities for units whose aggregate exposure is above ₹100 crore.
  • Relief to the large units will ensure flow of working capital across the supply chain, spurring industrial recovery.
  • A relaxed timetable on loan repayments will aid this process.

What could have been done differently?

  • Instead of a cast-iron framework for banks, the panel could have allowed for some flexibility in interpretation, both within a sector and over time, especially in a situation of exceptional uncertainty.
  • By limiting the restructuring exercise at present to two years, the panel may have taken a rather sanguine view of the economic recovery process.
  • Some of these assumptions must be reviewed periodically, if the situation so demands.
  • The panel leaves little room for banks to deploy their traditional, sector-based expertise.

What could be done?

  • The RBI should focus on higher provisioning, and in a graded manner, for restructured loans.
  • This should allow banks to take some initiative on the lending side.
  • An ongoing committee that can provide expertise to banks from time to time on loan restructuring can also be considered.
  • Over time, a centrally conceived template for lending and restructuring will enhance credit appraisal skills along the rank and file of the banking system.
  • That said, the need for such a framework cannot be overstated in these times of crisis.
  • It seeks to reconcile prudence with higher lending.
  • It is for the banking sector to pick up the tab.

 

Source: Business Line

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