KV Kamath panel formed by RBI to make policy on loan restructuring during this pandemic

Veteran banker KV Kamath is making a comeback to India after five years — this time heading a panel that will work out the contours of a mega one-time restructuring plan to assist stressed borrowers hit by the coronavirus pandemic.

Veteran banker KV Kamath is making a comeback to India after five years — this time heading a panel that will work out the contours of a mega one-time restructuring plan to assist stressed borrowers hit by the coronavirus pandemic.

According to the details released by the RBI on August 6, the Kamath panel will have the final say on whether a high-value loan, beyond a threshold, is eligible for the one-time restructuring.

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The panel will also make recommendations to the RBI on the required financial parameters, along with the sector-specific benchmark ranges for such parameters, to be factored into each resolution plan.

Kamath demitted office as the President of the National Development Bank (NDB), the development institution working for BRICS countries, on May 27 handing over the baton to Marcos Prado Troyjo, former deputy economy minister of Brazil.

At NDB, Kamath played a key role in consolidating operations across the region. During Kamath’s term, BRICS Bank disbursed a one billion dollar emergency loan to India.

Kamath is a visionary in the Indian banking industry. He is credited with building ICICI Bank from a lending institution to one of the biggest banks in the country while navigating it through multiple crises including a near-run on the bank in Gujarat in 2003 following certain rumours in local newspapers.

His primary task is to prepare the dos and don’ts for the massive loan restructuring exercise. That includes validating resolution plans for loan accounts above a threshold. He will also need to look at sector-specific parameters for the loan recast.

That is a complicated task given that different sectors have been impacted differently on account of COVID. Also, there is a possibility of complaints from specific sectors which don’t get the desired benefit from the restructuring exercise. One-time loan recast is critical for the banking industry to exit from the moratorium dilemma. According to the Reserve Bank, an average 50 per cent of the banking industry loans are currently under moratorium and in a worst-case scenario, close to 15 percent of the loans given by banks could turn bad by March 2021.

Kamath’s first task will be to identify the sectors hit by the COVID most and make sure these industries get the recast benefit. According to the RBI directions issued on August 6, only those borrower accounts shall be eligible for resolution under this framework which was classified as standard, but not in default for more than 30 days with any lending institution as on March 1, 2020. “Further, the accounts should continue to remain standard till the date of invocation. All other accounts, as hitherto, may be considered for resolution under the June 7th Prudential Framework, or the relevant instructions as applicable to a specific category of lending institutions where the Prudential Framework is not applicable,” the RBI said.

The tricky part is the limited time to do all this. According to RBI, the resolution plan can be invoked anytime till December 31, 2020, and shall have to be implemented within 180 days from the date of invocation. This means the Kamath panel will have to work overtime to frame the rules of the game and make recommendations to the RBI.

There is a section of analysts who warn that this will only elongate the pain or delay the inevitable—a sharp rise in the NPAs of the banking sector at the end of the damage control exercise (moratorium, loan recast). If that happens, the banking sector will plunge into a far deeper crisis than now. This is because banks need to set aside substantial amount of money to cover losses from such loans. This impacts their profitability.

 

Source: Moneycontrol