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.

Victor Calanog, Ph.D.
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Related Articles
ESAs Publish Reporting Templates for Financial Conglomerates
ESAs published the final draft implementing technical standards on reporting of intra-group transactions and risk concentration of financial conglomerates subject to the supplementary supervision in EU.
EBA Publishes Report on Asset Encumbrance of Banks in EU
EBA published the annual report on asset encumbrance of banks in EU.
US Agencies Publish Updates for Call Reports, FFIEC 101, and FR Y-9C
FED updated the reporting form and instructions for the FR Y-9C report on consolidated financial statements for holding companies.
EBA Proposes Guidelines for Establishing Intermediate Parent Entities
EBA issued a consultation paper on the guidelines on monitoring of the threshold and other procedural aspects of the establishment of intermediate EU parent undertakings, or IPUs, as laid down in the Capital Requirements Directive.
EC Adopts Financial Reporting Changes Arising from Benchmark Reforms
EC published Regulation 2021/25 that addresses amendments related to the financial reporting consequences of replacement of the existing interest rate benchmarks with alternative reference rates.
BIS Bulletin Examines Key Elements of Policy Response to Cyber Risk
BIS published a bulletin, or a note, that examines the cyber threat landscape in the context of the pandemic and discusses policies to reduce risks to financial stability.
HMT Updates List of Post-Brexit Equivalence Decisions in UK
HM Treasury, also known as HMT, has updated the table containing the list of the equivalence decisions that came into effect in UK at the end of the transition period of its withdrawal from EU.
EBA Issues Erratum for Technical Package on Reporting Framework 3.0
EBA published an erratum for technical package on phase 1 of the reporting framework 3.0.
APRA Publishes FAQ on Measurement of Credit Risk Weighted Assets
APRA updated a frequently asked question (FAQ), for authorized deposit-taking institutions, on the measurement of credit risk weighted assets.
ECB Letter Sets Out Strategies to Address Issue of Nonperforming Loans
ECB published a letter from Andrea Enria, the Chair of the Supervisory Board of ECB, answering questions raised by the President of the Bundestag (the German federal parliament) on how ECB assesses the financial stability of the euro area in the context of the significant level of nonperforming loans.