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Kamath panel framework better than CDR, but may just postpone recognition of stress: Analysts

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Mumbai, Sep 8 (PTI) The K V Kamath panel's loan recast recommendations are better than the erstwhile corporate debt restructuring (CDR) mechanism, but these may result in banks postponing recognition of stress through short-term relief, analysts said on Tuesday.

In the absence of an economic revival and sector-specific packages to be introduced by the government, the new mechanism will be 'challenging' and may also end up induce uncertainty in the credit markets as banks focus on working out the recast plans in the limited window, they said.

The Reserve Bank of India (RBI) has operationalised the guidelines from Tuesday, which give relief to 26 listed sectors affected by the coronavirus pandemic and stress on banks factoring in leverage, liquidity and debt serviceability before admitting a case.

The framework is for a limited time-period and stresses upon upfront heavy provisioning, stringent financial thresholds for eligibility and supervisory mechanism, analysts at the domestic brokerage Emkay said, terming it as 'far better than CDR'.

They said the CDR was extensively used to suppress non-performing assets and had a success rate of as low as 15 per cent.

Stressed borrowers in real estate, traders, hotels/restaurants segments will be helped, but resolving stress in lumpy power and infrastructure sectors through this mechanism will be challenging without economic revival and sector-specific packages or initiatives by the government, they said.

However, analysts at Anand Rathi sounded a bit circumspect, saying this is a step in the right direction but given the lenders' track record, it will only 'postpone the stress'.

It feared a 'good portion' of the accounts which will be restructured will eventually turn non-performing and added that it gives a 'short-term relief' alone.

According to the committee, Rs 38 lakh crore of debt is held by banks in the identified sectors, constituting about 37 per cent of the overall industry assets.

'The Kamath committee recommendations induce a degree of uncertainty in the credit market as banks work out restructuring plans with their customers,' analysts at BofA Securities flagged, maintaining their 8 per cent credit growth target for the system.

ICICI Securities said the framework is much broader than anticipated but leaves some scope for subjectivity as thresholds are to be met 2021-22 onwards based on base-case financial projections.

Japanese brokerage Nomura said subjectivity involved around cashflow projections does increase some scope of misuse as well in unviable cases.

Expressing some reservation on the Kamath Committee report, Resurgent India Managing Director Jyoti Prakash Gadia said the RBI's one-size-fits-all approach is not appropriate, and the guidelines ignore the size, geography, sub-sectors and prescribe the parameters.

He also said the cashflow projections are a difficult proposition in uncertain times when there is no clarity on COVID-19 and still various restrictions are put on various industry.

Hence, he said it is premature to expect even reasonable certainty in the cash flow projections in view of continued uncertainty.

Cyril Amarchand Mangaldas Partner L Viswanathan said the RBI has sought to strengthen the inter-creditor agreement (ICA) mechanism by clarifying that it is mandatory and compliance of the signing of the agreement shall be assessed as part of its supervisory review.

'This should encourage signing of the ICA and preparation of resolution plans. The requirement for maintenance of escrow accounts will also aid monitoring and control,' Viswanathan said.

J Sagar Associates Partner Soumitro Majumdar said the regulatory clarity on ICA execution being mandatory will nip a lot of inter-creditor disputes in the bud, and compel focused efforts towards timely resolution plan implementation said.

Direction to grade sectors depending on the severity of the impact should also enable lenders to consider solutions commensurate with the market realities, he said adding that this dual approach should be effective in devising workable resolution plans. PTI AA DP HRS