KV Kamath Committee

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