RBI Circular Sets Out Financial Parameters for Resolution Framework
RBI issued a follow-up circular, to the resolution framework guidelines that were published in August 2020. This circular sets out five financial ratios and the thresholds for each ratio, with respect to 26 sectors, to be taken into account while finalizing the resolution plans. These financial ratios are total outside liabilities/adjusted tangible net worth (TOL/ATNW), total debt/EBITDA, current ratio, debt-service coverage ratio (DSCR), and average debt service coverage ratio (ADSCR). The sectors for which certain ratios have not been specified, the lenders shall make their own assessment, keeping in view the contours of the circular on resolution framework, dated August 06, 2020, and the follow-up circular.
In August 2020, RBI had announced the constitution of an Expert Committee to recommend the required financial parameters along with sector-specific benchmark ranges for such parameters to be factored in the resolution plans, in respect of borrowers eligible under Part B of the Annex to the circular on resolution framework (dated August 06, 2020). In September 2020, the Expert Committee submitted its report on the recommendations, which RBI has broadly accepted. The Committee has recommended financial parameters that, inter alia, include aspects related to leverage, liquidity, and debt serviceability. The Committee has recommended financial ratios for 26 sectors and these could be factored-in by lending institutions while finalizing a resolution plan for a borrower.
Therefore, all lending institutions shall mandatorily consider the five financial ratios while finalizing the resolution plans in respect of eligible borrowers under Part B of the Annex to the circular on resolution framework. The sector-specific thresholds for each key ratio that should be considered by the lending institutions in the resolution assumptions with respect to an eligible borrower are given in the Annex to the follow-up circular. Lending institutions are allowed to consider other financial parameters as well while finalizing the resolution assumptions in respect of eligible borrowers, apart from the mandatory key ratios and the sector-specific thresholds that have been prescribed.
Lending institutions are expected to ensure compliance to the TOL/ATNW ratio agreed as per the resolution plan at the time of implementation. Nevertheless, in all cases, this ratio shall have to be maintained as per the resolution plan by March 31, 2022 and on an ongoing basis thereafter. However, wherever the resolution plan envisages equity infusion, the infusion may be suitably phased-in over this period. All other key ratios must also be maintained as per the resolution plan by March 31, 2022 and on an ongoing basis thereafter. Compliance with the agreed ratios must be monitored as financial covenants on an ongoing basis and during subsequent credit reviews. Any breach not rectified within a reasonable period, in terms of the loan contract, will be considered as financial difficulty.
Keywords: Asia Pacific, India, Banking, COVID-19, Resolution Framework, Regulatory Capital, Credit Risk, Expert Committee, Resolution Plan, RBI
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Nick Jessop
Scenario modeling expert; risk management specialist; quantitative financial modeler
Related Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.