One Time Restructuring (OTR) and It’s Impacts

The Reserve Bank of India (RBI) notified a resolution framework (known as OTR)  through its circular dated August 6, 2020, to support corporate facing stress because of the Covid-19 pandemic.

The OTR will follow a framework to restructure any debt procured by corporations or businesses, this structural change will help them mitigate any damages done by pandemic. In this article let’s learn about

 

Why restructuring is required?

COVID-19 has impacted many lives in different ways. Whether you are a businessman or a common man, pandemic has disrupted economy on large scale that we get to witness rarely. Problems in economy directly affects businesses at various level. Indian economy is no different when it comes to its reliance on global market. With globalization, Indian businesses have grabbed opportunity to expand their reach and have done successfully in past. With Pandemic, these businesses have been under stress, so RBI came up with One Time Restructuring (OTR) on August 6, 2020 to support corporate.

Opportunity of One Time Restructuring, understanding it in depth:

Various business that has been affected with Pandemic have taken various measures to relieve financial stress. Approaches include liquidating assets, restricting unnecessary spend or optimizing their workforce to get ready for restrictive work environment for their safety. With financial strain many of these businesses have changed their workflow and now operating in different scenario which was not intended. Restructuring is already happening at their workforce level and restructuring debt will allow them to operate more efficiently and plan according to their current situation.

Restructuring debt is usually allowed with specific cases only. With Pandemic this process is allowed to businesses that are in desperate need of financial resources to support workforce.

Who is eligible of One Time Restructuring?

A question arises that who is applicable for One Time Restructuring as supporting businesses is capital incentive task and it costs lenders too. The RBI has put following conditions for OTR applicability:

• Classified as Standard Companies
• Not in Default for more than 30 days as on 1^st March, 2020
• Accounts of the companies opting OTR should remain standard till approval of OTR plan by lenders and company.

What’s allowed under OTR?

• Leander may extend residual tenor of loans with / without payment moratorium, by over two years and / or provide additional loan sanctions.
• Introduction of Optional framework which provides conversion of debt to equity or other marketable debt securities issued by the borrower.

Moreover, the following entities would not be included:

• As on March 1, 2020, the MSME borrowers whose aggregate exposure to lending institutions collectively is 25cr or less
• Loans given to the Central and State Governments, local Government bodies, Primary Agricultural Credit Societies (PACS) or Farmers’ Service Societies (FSS)
• Loans granted by lenders to their own personnel or staff; and

Further, it is very important to note that the loans taken from non-banking organizations are also included in the Resolution framework’s ambit. Therefore, organizations whose loans are eligible for resolution would include all Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks), all Primary (Urban) Co-operative Banks/State Co-operative Banks/ District Central Co-operative Banks, all All-India Financial Institutions, all Non-Banking Financial Companies (including HFCs).

SEBI’s stand on OTR:

Securities and Exchange Board of India (SEBI) has clarified that restructuring by lenders/investors which is solely due to COVID-19 related stress or under RBI’s framework dated 6 August 2020 may not be treated as default by credit rating agencies. This is applicable till 31^st December 2020, the last date of invocation of restructurings under the RBI framework.

Some Drawbacks:

Though it is to be noted here that the RBI circular does not provide for a standstill of asset classification by banks if a company that has applied for OTR, misses payments on its debt obligations during the period of implementation of the OTR. On missing debt payments, banks will continue to classify loans under SMA/NPA and subsequently upgrade the status on implementation of the OTR, which is unlike what was allowed as per one of the earlier RBI Circular of 27 March, 2020.

Rating Agency’s Approaches of Default Recognition:

In light of these regulatory developments, credit rating agencies has come up with default recognition framework to appropriately factored recent regulatory guidelines. The rating agencies expects some of their clients to avail the benefits of OTR. The rating agencies also expects some procedural delays on the part of lenders while deciding on the OTR applications.

Hence, the rating agencies may not recognize default as per the original repayment schedule under the various scenarios as mentioned below. Though, the rating agencies may not recognize default but there may be suitable rating actions to reflect the changes in the credit profile of the borrowers. The broad framework of default recognition under different scenarios is outlined below.

Scenario 1
Missed payment as per the original schedule before application for restructuring and no application for restricting is made.

Rating Action:
All the rating agency will consider it as Default and downgrade the rating to “D”.

*Since, there is no specific guideline on OTR, probable action is based on their existing default recognition policies.

Scenario 2:
Missed payment as per the original schedule after application for restructuring and Lenders has rejected the proposal or indicated that the application is likely to be rejected.

Rating Action:
All the rating agency will consider it as Default and however as per the default recognition guidelines of 3 rating agencies namely CRISIL, ICRA and Brickworks, if the borrower pays any overdue amounts within a reasonable grace period allowed by the banker, the same will NOT considered as a Default. 

*Since, there is no specific guideline on OTR, probable action is based on their existing default recognition policies.
(1) No Default if the borrower regularly pays any overdue amounts within a reasonable grace period allowed by the lender.

Scenario 3:
Missed payment as per the original schedule after application for restructuring and the lender has approved the application or indicated that the application is likely to be accepted.

Rating Action:

*Since, there is no specific guideline on OTR, probable action is based on their existing default recognition policies.

 Scenario 4:
Missed payment as per the original schedule after application for restructuring and the lender had initially indicated that the application is likely to be rejected and If the OTR is subsequently implemented.

Rating Action:
Initially the rating action will be as per Scenario 2 mentioned above however if the OTR is subsequently implemented the rating will be moved to non-default category however the criteria for curing post default will apply.
Initially as per Scenario 2.

*Since, there is no specific guideline on OTR, probable action is based on their existing default recognition policies.
(1) No Default if the borrower regularly pays any overdue amounts within a reasonable grace period allowed by the lender.

 Once the OTR is implemented

*Since, there is no specific guideline on OTR, probable action is based on their existing default recognition policies.

Conclusion

“The regulatory approach has to be “dynamic, proactive and balanced”; The RBI will ensure that necessary safeguards are in place to maintain financial stability” says the RBI Governor Das said when announcing OTR Policy. While many are struggling to get out of temporary setback, the regulators also have come up with supporting policies to help genuine business to support in harsh times.

The Ratings agencies have complied with OTR and came up with framework to recognize and restructure businesses affected. There are tons of reasons where a business can slump into debt crisis and credit ratings become essential to let them out of debt crisis. Restructuring loans will allow business to focus on vital things like ramping up production, sales and ultimately bringing profits so that they can pay lender without stressing whole economy. When everyone is facing same situation, it is a wise and welcoming move for industries.

Deadlines Are Close:

Deadline is 31^st December, 2020. So, if your organization has to taken any steps to restructure or created a plan yet, it is right time to take right actions. Consultancy like ACC Ratings help businesses creating proper planning & structuring to optimize overall business.

Know more about: Effects of sound repayment history on credit rating process