Draft for discussion Confidential

Discussion note on key actions and

reforms for the banking sector required
upon opening up of businesses post the
COVID-19 crisis
14 April 2020
0
Draft for discussion Confidential

Contents

1 Introduction..................................................................................... 2
2 Current regulatory and policy environment ....................................... 3
3 Immediate impact of COVID-19 and problem statement.................... 4
4 Objectives ........................................................................................ 6
5 Categorisation of companies............................................................. 7
6 Resolution for Sustainable Businesses (category A) .........................12
7 Resolution for Potentially Sustainable Businesses (category B) ........13
8 Resolution for Unsustainable Businesses (category C) .....................14
9 Additional support by the Government of India ................................15
10 Structuring of banks ......................................................................16
11 Conclusive remarks .........................................................................17
12 Summary ................................................. .......................................18
13 Interim measures ..........................................................................20
14 Contact details ...............................................................................21
14 Acknowledgment ...........................................................................21

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1. Introduction
1.1. The onset and rapid spread of the Novel Coronavirus Disease (“COVID-19”) is taking a
toll on human lives as well as hindering businesses across the globe. This poses a high
risk to the Indian economy (“Crisis”).

1.2. In less than two months, the footprint of the virus has expanded beyond China to more
than 200 countries. As healthcare systems across the world are not equipped to manage
the surge in cases, many countries took steps such as social distancing (in the form of
imposing lockdowns and quarantine throughout the country) to contain the spread of
COVID-19.

1.3. In addition, globally the problem is magnified from an economic standpoint on account
of the convergence of other factors. These factors include the oil price war, which has
led to a significant reduction in price beyond what would be attributable to a decrease in
demand on account of COVID-19, due to oversupply. These factors together have
further led to credit funding and market dislocations, including a fall in yields.
Economists are concerned that the impact can be amplified across sectors due to knock-
on and multiplier effects across businesses.

1.4. India is also under lockdown where businesses (except those engaged in essential goods
and services) have paused operations to minimise the impact and spread of COVID-19.
There is significant concern that once the economy opens up and businesses return to
normality, the disruption due to this Crisis could lead to a systemic failure of businesses
and the banking system because of a steep decline in asset quality, and a string of
covenant breaches and defaults.

1.5. The Reserve Bank of India (“RBI”) has advised lenders to offer a three-month
moratorium on term loans and deferment of interest payment for working capital
facilities. On a macro level, it would be advisable to provide additional boost to the
business environment in terms of additional liquidity, ensuring additional liquidity for
businesses that need it the most, policy impetus for priority sectors, etc., to help
businesses and economy normalise at the earliest. The stabilisation of businesses may
involve spreading the impact of this shock over a longer time horizon.

1.6. The government’s revenues have shrunk due to the Crisis, but its expenditure has
increased towards providing necessary healthcare and essential goods and services
during lockdown. As a result, its ability to offer additional packages to industry is
limited. Also, focused distribution of any economic package would be time consuming.
Hence, it may not serve the purpose of timely intervention or be wasteful if misdirected
due to lack of rigour in determining rightful recipients.

1.7. Here, we believe the banking sector could step in to provide the desired and focused
relief required. Therefore, it provides necessary support to businesses.

1.8. If proactive action is not taken at this stage, the impending recession would cut much
deeper and possibly last longer.

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2. Current regulatory and policy
environment
2.1. The RBI is the governing body that regulates commercial banking and non-banking
financial companies in India. The following key RBI regulations are critical for our
subsequent discussions and reproduced below for reference:

2.1.1. Master Circular – Prudential Norms on Income Recognition, Asset Classification, and
Provisioning Pertaining to Advances dated 1 July 2015 (as amended)1: This circular
provides for the norms to be followed for income recognition, asset classification, and
provisioning.

2.1.2. Prudential Framework for Resolution of Stressed Assets dated 7 June 2019 2 (“RBI
Resolution Framework”): This framework provides for early recognition, reporting,
and time-bound resolution of stressed assets. It allows complete discretion to lenders
with regards to design and implementation of resolution plans, subject to the specified
timeline and independent credit evaluation. The framework stipulates a system of
disincentives in the form of additional provisioning for a delay in implementation of
resolution plan or initiation of insolvency proceedings. The lenders are required to enter
into an inter-creditor agreement to provide for ground rules for finalisation and
implementation of the resolution plan in respect of borrowers with credit facilities from
more than one lender. Any decision, per the terms of the ICA, with 75 percent voting
share by value and 60 percent voting share by number would be binding on lenders.
For implementation of resolution plans, other requirements are prescribed that include
credit ratings, additional provisioning in case of dissenting lenders, and satisfactory
performance for upgrading.

2.1.3. Master Direction - External Commercial Borrowings, Trade Credits, and Structured
Obligations dated 26 March 2019 (updated as on 8 August 2019)3: The provisions
relating to External Commercial Borrowings (ECBs) are governed by the Foreign
Exchange Management (borrowing and lending) Regulations, 2018, new ECB framework
dated 16 January 2018 and master directions on ECBs, trade credits, and structured
obligations dated 26 March 2019 (collectively referred to as “ECB Regulations”) under
Foreign Exchange Management Act 1999 (FEMA).

2.2. Insolvency and Bankruptcy Code 4: The Insolvency and Bankruptcy Code, 2016 (“IBC”)
is a crucial legislation, and consolidates and amends the laws relating to reorganisation
and insolvency resolution of corporate persons, partnership firms, and individuals in a
time-bound manner for maximisation of value of assets of such persons, to promote
entrepreneurship, ensure availability of credit, and balance stakeholders’ interests. IBC
provides an effective platform for resolution of companies in default of their financial
obligations. Sometimes, the code provides a deterrence that promotes resolution of the
stressed accounts under the RBI Resolution Framework.

1
https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9908
2
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11580&Mode=0
3
https://m.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11510
4
https://ibbi.gov.in//webadmin/pdf/legalframwork/2017/Jul/IBC%202016.pdf

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3. Immediate impact of COVID-
19 and problem statement
3.1. Primary Impact - Businesses would go through an extended but a finite period with
reduced revenues and continuing fixed costs. During this Primary Impact Period,
business activities across various sectors shall be severely affected. At the same time,
some businesses may be seen to be resilient, and some may have even done better.
However, there is large concern that a majority of businesses would look at large
costs/losses, resulting in a weaker balance sheet.

3.2. Primary Impact Period: This is anticipated to continue for a finite time period (may be
two quarters), after which businesses would start returning to normality.

3.3. Normalisation: After the Primary Impact Period, businesses will resume normality
through a recovery curve, which could be (a) a rapid V-shaped curve, or (b) a gradual
U-shaped curve, or (c) in the worst case scenario in an L-shaped curve.

3.4. Liquidity crunch: The abnormal losses caused by the Crisis, including a halt in trading,
could lead to pressure on cash position and working capital. Some businesses may not
have enough liquidity to meet operating expenses, debt servicing, etc. They may
struggle once situation normalises and require additional working capital to restart or
normalise operations.

3.5. Potential rating downgrade: Due to impaired operations during this period, the
abnormal losses could lead to a breach of ratios and business metrics, which were
agreed in lending covenants. This poses an additional risk of increased pressure on cash
flows. A downgrade of the rating can lead to additional costs of capital on incremental
debt from existing lenders (due to a lower rating) and a liquidity challenge as new
banks/lenders would be averse to lending to businesses with rating below certain
thresholds. It could also lead to additional pressure on companies that have borrowed
money from the domestic and offshore markets (from insurance companies, mutual
funds, and offshore debt/impact investors) in the form of NCDs, ECBs, PTCs, and via
direct assignments. These instruments are currently not under the RBI moratorium. A
rating downgrade of one instrument could potentially trigger accelerated redemptions on
other instruments of the borrower.

3.6. Domino effect: Reduction in rating can lead to additional costs of capital and trigger an
event of default. This can allow lenders to recall their funds and hence, further increase
the stress on businesses. When the businesses starve for liquidity, they will be unable to
borrow to resume their normal operations because of their revised lower ratings. This in
turn will cause businesses, which are long-term Sustainable Businesses to also default in
the short term.

3.7. Effect on banking sector: Large-scale business defaults would result in burgeoning
non-performing assets, leading to massive provisioning requirement, and adversely
affecting banking liquidity and operations. It could in turn cause potential failure of the
banking system.

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3.8. Need for intervention: The government and the RBI should consider to intervene to
ensure that businesses do not collapse en masse and in turn, push banks into a
systemic lockdown/failure due to points 3.1 to 3.7 mentioned above (the “Crisis Trap”).

3.9. Resolution: The government, the RBI, and banks should consider to collectively focus
on Sustainable Businesses and pull them out of the Crisis Trap. Even if such businesses
may be more limited in number and larger, the impact of their survival would be far
reaching. Their survival will affect their vendors in their supply chains, customers in the
chain downstream, and the related ecosystems.

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4. Objectives
4.1. This note discusses whether it is possible to isolate the effect of this Crisis on businesses
and define actions. Such actions, if taken, can restrict or mitigate the impact on
sustainable businesses and simplify the restructuring process for other businesses to
ensure that we do not end up in a situation of a systemic lockdown of the banking
system.

4.2. This would include allowing the sustainable businesses, if required, to obtain additional
financing.

4.3. This note also discusses various innovative solutions that the government, the Ministry
of Finance, the RBI, and lenders could consider.

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5. Categorisation of companies
5.1. It is critical to look at banks’ asset portfolios and classify accounts in broad buckets,
after the Crisis, so that a targeted approach may be taken as follows:

5.1.1. Category A – Businesses that would be healthy, after excluding the impact of the
Crisis, and project forward as sustainable with support, in the form of additional
liquidity and some augmenting of the balance sheet, would qualify as Sustainable
Businesses. Simply put, such businesses whose rating, after adjusting for the “COVID
Crisis Investment” (defined as excess of operating costs, including non-cash and
finance costs, over revenues during the Primary Impact Period) made by it and the
potential Crisis Liquidity Bridge assumed to have been disbursed by banks, being
lower by not more than [2] notches of their last rating and more than [RP4] would
also be defined as long-term sustainable businesses (“Sustainable Businesses”).
The government may issue a clarification to the existing accounting standards and the
provisions of the Companies Act, 2013 to allow recognition of the COVID Crisis
Investments in companies’ books. This would enable compliances, and provide a
guidance for statutory and internal audit purposes.

5.1.2. Category B – Businesses that have the potential to be healthy but require support
beyond additional liquidity and augmentation of the balance sheet, in the form of
restructuring of their existing liabilities, would fall in this category. In such cases,
after suitable restructuring, a company’s rating, after proposed restructuring and
adjusting for the COVID Crisis Investment made by it and the potential Crisis Liquidity
Bridge assumed to have been disbursed by the banks, being lower by not more than
[2] notches of the last rating and more than [RP4] would also be defined as long-term
potentially sustainable businesses (“Potentially Sustainable Businesses”). For
these businesses, a resolution through restructuring is likely to be possible with or
without current management.

5.1.3. In cases of Sustainable Businesses and Potentially Sustainable Businesses, initiation

of insolvency or security enforcement may possibly lead to further deterioration of
value and not result in a meaningful realisation for lenders. Therefore, insolvency or
security enforcement is not considered an optimal solution.

5.1.3.1. These businesses are likely to benefit from additional liquidity based on feasibility
studies, a high level of monitoring, possible deep restructuring in cases of EBITDA
potential, etc.

5.1.4. Category C – Businesses that after Crisis are unsustainable or where the promoter’s
integrity/capability is considered doubtful (“Unsustainable Businesses”) would fall
in this category.

5.1.4.1. For this category, banks may consider preserving or nurturing assets until the market
stablises. After that, they can seek to monetise, or where required, take immediate
action in terms of IBC, enforcement of security, etc.

5.2. In the past, banks typically found it hard to classify accounts as that involved a
significant level of judgement and responsibility. A simple and systematic approach
has been proposed to enable the categorisation for this purpose. Further,

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 categorisation based on these pre-defined criterions should not be subject to scrutiny
in the future, enabling its efficient implementation.

5.3. Limited review of information provided by the company will be undertaken by its
statutory auditor within a fixed timeframe of preferably about 3 days to quantify the
COVID Crisis Investment quantum for the company. Banks could then, with the
assistance of suitable external agencies, if required, carry out an internal rating
exercise to evaluate whether a maximum Crisis Liquidity Bridge of up to the COVID
Crisis Investment amount would help the company run as (a) a Sustainable Business
or (b) a Potentially Sustainable Business or (c) would not be able to prevent it from
being unsustainable. Such a rating for classification would be undertaken within 7
days of the receipt of such application for a Crisis Liquidity Bridge by the company.

5.4. Such application shall be made by the company to the lead bank of the consortium or
the largest lender to the company, as the case may be (the "Processing Bank").

5.5. The Processing Bank shall form a committee, which shall be the single window, for
clearance of such Crisis Liquidity Bridge and review of the credit for the bridge. If
approved, the amount of the Crisis Liquidity Bridge shall be disbursed pro rata by
Indian banks, NBFCs, and financial institutions to their current lending as a share of
total lending by Indian banks, NBFCs, and institutions to the company, unless the
Processing Bank decides to disburse the entire amount itself.

5.6. The Processing Bank and other Indian banks, NBFCs, and institutions shall disburse
the Crisis Liquidity Bridge amount within 3 working days from its approval by the
Processing Bank.

5.7. Further, the companies may be required to submit quarterly or half-yearly audited
accounts to revalidate the COVID Crisis Investment.

5.8. The proposed support should be implemented through a “two-step process”.

5.9. Step 1: Balance sheet correction

5.9.1. To implement this, the following actions should be considered:

5.9.1.1. The RBI should suspend fresh ratings for a period of three quarters from date of
publication of notification, making effective tenets of this proposal. Covenant testing
should be deferred or may be relaxed suitably based on the current situation of
businesses.

5.9.1.2. A specific COVID dispensation by way of an amendment to the accounting standards

or releasing of a new accounting treatment by Ministry of Corporate Affairs (MCA) or
Institute of Chartered Accountants of India (ICAI), in connection with the existing
accounting standards, and corresponding amendment in the Companies Act, 2013
may be introduced. It should allow for capitalisation of COVID Crisis Investment and
their subsequent amortisation over a period of [5] years, and their treatment as
special deferred expenditure as part of long-term sources until they are fully
amortised. The impact on account of COVID Crisis Investment is being moved from
profit and loss (P&L) account to the balance sheet, where it would have earlier
reduced reserves and surplus, but would appear as COVID Crisis Investment in lieu of
cash/liquidity erosion on the asset side. For funding of such cash/liquidity erosion,
Crisis Liquidity Bridge support is proposed to be provided by banks.

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5.9.1.3. This would avoid such costs to be directly reflected in their P&L, and amortised over a
period of say 5 years. This capitalisation and subsequent amortisation over a period
would gradually help bring the financial ratios and business metrics back to normal. It
seeks to isolate the effect of the Crisis and reduce a potential cascading effect.

5.9.1.4. The RBI and banks should come with a policy (or a special dispensation) to note this
amendment and require consideration of revised profitability situation after making
such adjustments. Earlier, lenders often sought to add back adjustments relating to
intangibles. Hence, the RBI could offer a special dispensation to banks to restrict the
adding back of the amortised amounts while testing for lending covenants or even for
new financial analysis.

5.9.1.5. Testing for lending covenants or financial analysis for the purpose of ratings, etc.,
should also be for a period excluding Primary Impact Period during the financial year
for a normalised analysis. For the purpose, audited financial statements may report
accounts after capitalising the COVID Crisis Investment, hence limiting its impact on
the company’s P&L account.

5.9.1.6. This adjustment should also be applicable for listed bonds that SEBI governs. SEBI
should also recognise and allow the amortisation.

5.9.1.7. The RBI and SEBI can also consider making this adjustment applicable for rating
agencies during their evaluations.

5.9.1.8. Banks should proceed with Crisis Liquidity Bridge disbursement on the basis of the
internal ratings process to be undertaken by them as envisaged above. This could be
revalidated by subsequent ratings carried out within two quarters of such
disbursement by a third-party rating agency.

5.9.1.9. Banks should continue classifying the accounts in line with currently applicable
guidelines (standard, SMA1, SMA2, etc.). Only an adjustment on account of COVID
Crisis Investment and Crisis Liquidity Bridge will be carried out to continue with the
current classification (standard, SMA1, SMA2, etc.).

5.9.1.10. The suggested categories are not a new classification system but guidelines for
disbursement of the Liquidity Crisis Bridge in line with the COVID Crisis Investment
made by a company. The system remains unaltered but will be applied after
adjustment for both the Crisis Investment and the Crisis Liquidity Bridge (to
determine whether the Crisis Liquidity Bridge is actually to be disbursed).

5.10. Step 2: Liquidity correction

5.10.1. For businesses that can continue to be viable on the basis of above analysis and
balance sheet augmentation, additional funding could be provided to restore
businesses and for working capital.

5.10.2. The RBI needs to direct banks to consider a Crisis Liquidity Bridge, which matches the
COVID Crisis Investment by the Company after the single window clearance process
for categories A and B.

5.10.3. Businesses that require additional funding in order to remain viable, and those that
are not meeting the criteria for categories A and B, could be considered for corrective
actions on a case-by-case basis, by banks.

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5.11. Government’s role

5.11.1. The government may consider to provide limited support in the form of:

5.11.1.1. Guarantee/support to the debt raised by banks to provide the Crisis Liquidity Bridge
to various qualifying companies.

5.11.1.2. Guarantee to lending banks for the Crisis Liquidity Bridge, provided by them to each
qualifying company, for benefit of the bank against any loss/default on account of
Crisis Liquidity Bridge. This will collateralise the loan extended and eliminate the need
for any additional security creation against the company’s assets or by means of
personal guarantees of promoters for the express disbursement of the Crisis Liquidity
Bridge, and there wouldn’t be any impact on bank’s balance sheet in form of
additional provisioning on account of Crisis Liquidity Bridge.

5.11.1.3. Amend The Fiscal Responsibility and Budget Management Act, 2003 5 and general
financial rules to facilitate provision of aforementioned guarantee beyond annual
limits and relaxation in associated conditions as may be required.

5.11.1.4. Potential monetisation of dues from governments can further aid liquidity. A short-
term solution to secure additional funding by banks could be issuance of certificates
of dues (such as an IOU) by the government, with specific provision made for
recognising such certification as due security. Such a certificate carrying enabling
language that allows for it to be mortgaged to institutions that lend against it, to
ensure that the certificate may be cashable by those lending against it. This can be
useful for monetisation of refunds, taxes, etc.

5.12. RBI’s role

5.12.1. The RBI may consider to provide limited support in the form of:

5.12.1.1. Allow creation of a special account by banks to deal with the Crisis Liquidity Bridge to
various qualifying companies’ requirements.

5.12.1.2. Interim liquidity to banks through reduced CRR to fund the Crisis Liquidity Bridge for
various qualifying companies.

5.12.1.3. Issuing debt by banks to the RBI/public at large to be allowed to raise funds
equivalent to the Crisis Liquidity Bridge provided to various qualifying companies by
banks, and return the additional liquidity they had used during the CRR relaxation.

5.12.1.4. The RBI should suspend fresh ratings for a period of three quarters from the date of
publication of a notification, making effective tenets of this proposal.

5.12.1.5. Directing rating agencies to adjust for COVID Crisis Investment and Crisis Liquidity
Bridge to monitor current and assess future ratings.

5.12.1.6. Issue requisite guidelines for banks to consider the following:

5
https://dea.gov.in/sites/default/files/FRBM%20Act%202003%20and%20FRBM%20Rules%202004.pdf

10
5.12.1.6.1. Revised profitability situation of businesses after making requisite adjustments on
account of COVID Crisis Investment

5.12.1.6.2. A Crisis Liquidity Bridge that matches the COVID Crisis Investment by the company
for sustainable businesses

5.12.1.7. A special treatment of the bonds to be allowed in banks’ balance sheets for Crisis
Liquidity Bridge support to be extended through a special account created in every
bank.

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6. Resolution for Sustainable
Businesses (category A)
6.1. Banks/NBFCs/financial institutions to disburse Crisis Liquidity Bridge to category A
businesses within timelines, upon approval of such funding by its single window
clearance committee of the Processing Bank.

6.2. Support from businesses

6.2.1. For additional control and monitoring, lenders should be permitted to:

6.2.2. Appoint a CFO/CRO or independent directors who shall represent lenders interests. The
CFO/CRO should have certain powers to block the business decisions, which may be
detrimental to the interest of the lenders.

6.2.3. Appoint agencies to monitor business operations and cash flows.

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7. Resolution for Potentially
Sustainable Businesses
(category B)
7.1. Amendment to the Prudential Framework for the Resolution of Stressed Assets

7.1.1. The RBI may notify guidelines to consider the current 7 June 2019 circular’s
recommendations in conjunction with impact of the potential Crisis Liquidity Bridge,
which matches the COVID Crisis Investment by the company.

7.1.2. In addition, the RBI may come up with a new framework for assets affected by the Crisis
and permit resolutions as proposed in the subsequent parts of this note.

7.2. Support from businesses

7.2.1. Additional control and monitoring:

7.2.2. Control provisions should be similar to the powers provided under the IBC, i.e., lenders
should be able to appoint someone CFO/CRO/director who shall report to lenders and
have control on the company’s cash flows. The CFO/CRO/director should also have a
veto power to prevent the promoter’s decisions (such as giving loans to group
companies, additional investments, and expansions), which may be detrimental to
lenders’ interest. This CFO/CRO/director should be a professional and responsible to the
bank, along with the company’s board and shareholders.

7.2.3. There should also be operational and cash flow controls, which require authorisations
from lenders’ representatives.

7.2.4. Deviations from the control or operating protocol would lead to lenders initiating
insolvency.

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8. Resolution for Unsustainable
Businesses (category C)
8.1. In this category, businesses are not sustainable or the viability is uncertain, or the long-
term viability cannot be established; for example, power projects that are incomplete
and require significant capital infusion to make the business operational.

8.2. These could also include cases where lenders do not have comfort from promoters; for
example, issues such as diversion of funds or the promoter’s doubtful integrity, are
identified from forensic reviews.

8.3. Four options are available for lenders.

8.3.1. Hold and work out: In some cases, given the current market situation, finding a buyer
can be challenging. It may be a better option to nurture the asset and sell at the right
time (not longer than [2] years later). Banks can look to appoint professional
management and even provide some funding or working capital to the extent there is a
commercial rationale and is required for value maximisation.

8.3.2. Sale: In cases where banks believe that sale of the assets including at a deep discount is
the best option, they should be permitted to sell and account for any loss over a period
of two-three to avoid a sudden impact on banks’ books. One of the pre-conditions to the
sale should be a proper price discovery process. Currently applicable guidelines relating
to sale of assets/ loans shall continue to apply, except for proposed amortization of
losses over an extended period.

8.3.3. Insolvency: Additionally, where banks believe that there is no good option in the
foreseeable future or they believe that the case is complex and an insolvency process
could be the best option, banks should refer the matter to IBC. This would be subject to
moratorium, if any, imposed by the Government on initiation of insolvency process in
light of Crisis.

8.3.4. Prepack provisions: The government is working on setting up a process for pre-pack
insolvencies, i.e., cases where the resolution is agreed before declaring a company
insolvent. This should be introduced immediately and can be used as a method of
parking assets into the bad bank.

8.4. Support from businesses

8.4.1. Additional control and monitoring

8.4.1.1. For these cases, high level of management is needed by banks. The bank representation
should have complete operational and financial control on the business.

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9. Additional support by the
Government of India (GoI)
9.1. The proposed solution also provides substantial benefit to the government:

9.1.1. The proposed solution avoids a direct budgetary support by the government to
businesses.

9.1.2. Instead of immediate cash outflow to support businesses in the form of refunds of tax
and other dues, by issuing certificates of dues that can be mortgaged to raise funds,
the government is able to preserve its own liquidity for now.

9.1.3. The proposed solution ensures that additional liquidity flows to businesses that need it
the most and avoids its potential waste due to lack of rigour in determining rightful
recipients.

9.1.4. This enables viable businesses to return to normalcy faster once the economy opens
up, preserve employment, growth of economy, etc. This helps prevent failure of the
banking system.

9.2. The government could come up with industry/sector specific concessions to support the
economy. These concessions may include an additional corpus of funds to be routed
through SIDBI for equity contribution for restructuring proposals.

9.3. The government may also allow entire COVID Crisis Investment as a tax-deductible
expense during the relevant financial year of the Primary Impact Period.

9.4. Income of banks/NBFCs/FIs from Crisis Liquidity Bridge may be exempted from tax or
taxed at a substantially lower rate for the next [2] years.

9.5. The option of the three-month moratorium (permitted by the RBI on account of COVID-
19) may result in cross defaults under certain lending covenants if either (1) offshore
bond issuers look at the moratorium as a potential restructuring of the loan or (2) there
is a breach of the ratings threshold stated in their agreement. In addition, companies
would be under redemption pressure for market borrowings currently not covered
under the moratorium. Therefore, Sustainable Businesses may not opt for this option
and struggle for a longer period to return to normalcy. The government may consider
advising banks to give additional loans to the extent of principal and interest loan
repayment between April 2020 and September 2020.

15
10. Structuring of banks
10.1. In the preceding sections of this note, we have proposed that lenders provide additional
funding and liquidity to businesses, which have the potential to be viable.

10.2. Given the magnitude of the Crisis where many businesses may fall under categories B
and C, these shall require specialised efforts from a resolution and recovery
perspective. Additionally, even the category A businesses may require additional
support from lenders.

10.3. To allow banks to concentrate on their core business of lending, the categories B and C
account can be carved out into another vehicle, which can issue paper to banks and
should allow amortisation of period.

10.4. From a structuring perspective, a separate accounting or vehicle where the stressed
accounts could be parked, is similar to the good bank and bad bank concept considered
in earlier cases of large bank restructurings of Citigroup, Royal Bank of Scotland, etc.

10.5. According to the concept, the assets that are dragging a business down or appear as
having a differential risk profile could be parked in a separate entity. Lenders will need
to identify the holdings that are worth less than their earlier estimates, and should park
them separately with a separate capital structure.

10.6. Unlike asset restructuring companies where sometimes incentives are misaligned due
to management fees, SRs, in case of the bad bank, there should be a higher incentive
to turnaround and recover by appointing professional management for monitoring
accounts from an operational perspective. The bad bank can first seek to work out or
nurture businesses until there is a stable market to sell them.

10.7. The creation of a ‘bad bank’ can insulate the healthy part of the banking institutions.

10.8. The bad bank should also be allowed to house ownership of asset for which no
adequate value was received under an IBC or Swiss challenge process.

10.9. The accounts managed by the bad bank should have viability studies carried out and be
extensively monitored.

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11. Conclusive remarks
11.1. There has to be a concentrated and proactive effort by the RBI, the Ministry of Finance
(including the Department of Revenue), SEBI, and banks, MCA, and ICAI to institute a
mechanism to check that healthy businesses should recover for a larger protection of
economy.

11.2. The RBI’s policies and guidelines for Income Recognition and Asset Classification
continue to remain applicable without any amendment. The RBI Resolution Framework
dated June 7, 2019 may be considered in conjunction with adjustment on account of
COVID Crisis Investment and impact of Crisis Liquidity Bridge.

11.3. Professional management should be of the highest level and the best practices should
be followed across accounts where banks are involved, with an objective to enable
restructuring and revive the economy.

11.4. Swift support is required to help businesses revive their operations and minimise the
impact of the Crisis. At the same time, the banking sector should initiate radical
changes, under enabling amendments by the RBI and finance ministry.

11.5. Ensuring the availability of adequate funding is essential to ensure that businesses do
not trip unnecessarily. With the help of professional management and monitoring,
turnarounds should be encouraged.

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12. Summary
12.1. Requirements/Support from the RBI

12.1.1. Suspend ratings for a period of three quarters.

12.1.2. Direct rating agencies to adjust for COVID Crisis Investment to monitor current and
assess future ratings.

12.1.3. Issue requisite guidelines for banks to consider the following:

12.1.3.1. Evaluate revised profitability situation of businesses after making requisite adjustments
on account of COVID Crisis Investment

12.1.3.2. Evaluate disbursal of Crisis Liquidity Bridge, which matches the COVID Crisis
Investment by the company for Sustainable Businesses

12.1.3.3. Evaluate disbursal of Crisis Liquidity Bridge, which matches the COVID Crisis
Investment by the company for Potentially Sustainable Businesses after restructuring

12.1.3.4. Categorise businesses in line with proposed predetermined criterion, to avoid any
scrutiny in the future, and proceed with applicable resolution – decision on additional
funding and subsequent disbursal by Indian consortium lenders (banks, NBFCs, and
FIs) of funding to businesses within a stipulated timeframe.

12.1.4. Consider providing concessional funding or a reduced CRR for a longer period of time to
facilitate additional liquidity with banks.

12.1.5. Allow a special treatment of these bonds in banks’ balance sheets for Crisis Liquidity
Bridge support to be extended through a special account created in every bank.

12.1.6. Provide a special window to banks to seek refinance against these specific assets.

12.1.7. Introduce amendment to the Prudential Framework for the Resolution of Stressed
Assets.

12.1.7.1. The RBI may notify guidelines to consider the current 7 June 2019 circular’s
recommendations, in conjunction with impact of the Potential Crisis Liquidity Bridge,
which matches the COVID Crisis Investment by the company.

12.1.8. Facilitate structuring of banks.

12.2. Requirements/Support from SEBI

12.2.1. Allow COVID Crisis Investment adjustment applicable for listed bonds, and recognise
and allow its amortisation.

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12.3. Requirements/Support from MCA

12.3.1. Amendment to the accounting standards or releasing of a new accounting treatment by

MCA or ICAI in connection with the existing accounting standards, and corresponding
amendment in the Companies Act, 2013, to allow the following:

12.3.1.1. Capitalisation of COVID Crisis Investment and their subsequent amortisation over [5]
year period

12.3.1.2. Treatment of COVID Crisis Investment as special deferred expenditure as part of long-
term sources until they are fully amortised

12.3.2. Facilitating limited review of company information by statutory auditors to quantify the
COVID Crisis Investment quantum for the company within a period of [3] days

12.3.3. Quarterly or half-yearly audit of businesses to facilitate revalidation of COVID Crisis

Investment quantum by banks

12.4. Requirements/Support from the government (including the Department of

Revenue)

12.4.1. Provide sovereign guarantee for bonds issued by banks to raise funds for this lending.

12.4.2. Provide guarantee to lending banks for the Crisis Liquidity Bridge, provided by them to
each qualifying company, for benefit of the bank against any loss/default on account of
Crisis Liquidity Bridge.

12.4.3. Issue certificates of dues (such as an IOU) owed by the government, with specific
provision made for recognising such a certification as due security. Such a certificate
carrying enabling language that allows for it to be mortgaged to institutions that lend
against it. This ensures that the certificate may be cashable by those lending against it,
and can be useful for monetisation of refunds, taxes, etc.

12.4.4. Industry/sector specific concessions, including additional corpus of funds, to support

the economy should be routed through SIDBI for equity contribution for restructuring
proposals.

12.4.5. The government may also allow entire COVID Crisis Investment as a tax-deductible
expense during the relevant financial year of the Primary Impact Period to provide
additional relief to businesses.

12.4.6. The government may consider advising banks to give additional loans to the extent of
principal and interest loan repayment between April 2020 and September 2020.

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13. Interim measures
13.1. The RBI should suspend fresh ratings for a period of three quarters to prevent
downgrade in ratings on account of the COVID-19 Crisis.

13.2. The government may consider advising banks to give additional loans to the extent of
principal and interest loan repayment between April 2020 and September 2020.

13.3. The RBI should consider providing concessional funding or a reduced CRR for a longer
period of time to provide additional liquidity to banks.

13.4. The government should allow banks raise funds from bonds, such as tax-free bonds,
with special permissions and provide sovereign guarantee if required.

13.5. The government should issue certificates of dues (such as an IOU). It should also allow
these certificates to be mortgaged, as an interim mean of monetisation of refunds,
taxes, receivable from the government, etc.

13.6. MCA/ICAI should advise statutory auditor to undertake the company’s limited review of
information and quantify the COVID Crisis Investment quantum. The RBI may also
advise banks to evaluate companies’ viability after suitable adjustment of COVID Crisis
Investment, and not take any coercive actions (such as invoking IBC and security
enforcement) against Sustainable/Potentially Sustainable Businesses until further
directions.

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14. Contact details
Sumit Khanna
Partner, Financial Advisory – Corporate Finance & Restructuring Services
Email: sumitkhanna@deloitte.com

Kaustubh Mittal
Director, Financial Advisory – Corporate Finance
Email: kmittal@deloitte.com

15. Acknowledgment
Uday Bhansali Vijay Iyer
Rajesh R Agarwal Shrenik Baid
Shailesh Verma Amrish Shah
Abhijit Guhathakurta Rajeev Suneja
Rajiv Chandak Nirav Pujara
Ashish Ahuja

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