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KV Kamath committee report: Will help real estate sector in debt servicing, raise buyer confidence, say experts

The KV Kamath committee has come out with guidelines for 26 sectors, including real estate and this long-awaited measure is expected to benefit the liquidity strapped sector, real estate experts said.

The loan restructuring parameters approved by the apex bank based on the recommendations of the KV Kamath committee would go a long way in benefiting the liquidity-strapped real estate sector that is reeling under the after-effects of the COVID-19 pandemic.

The KV Kamath committee has come out with guidelines for 26 sectors including the real estate sector and this long-awaited measure is expected to benefit the real estate sector, real estate experts said.

Most of the businesses including real estate continue to face headwinds due to weak market conditions. In this scenario, it was timely for RBI to allow one-time restructuring of corporate and personal loans (including home loans) in the last MPC meeting held in August 2020, they said.

For the realty sector, the restructuring will mostly be at a project level but the move will help the sector maintain liquidity, debt serviceability and in turn, increase buyers confidence, they said.

“For the timely implementation of this scheme, K V Kamath committee has come out with guidelines for 26 sectors including real estate. Being a long-awaited measure, real estate is expected to be major beneficiary of this,” said Ramesh Nair, CEO & County Head (India), JLL.

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Under this mechanism, RBI’s special resolution window would enable lenders to provide one-time restructuring of loans based on the prescribed framework pertaining to Covid-19 impacted assets.

“This is expected to benefit real estate developers including suppliers of key raw materials to reset their debt and provide a fresh lease of life to service their debt prudently. Also, this will enable corporates to focus on restarting their business in the next normal with renewed vigour and vitality. RBI has done a well-balancing act by covering individuals as well taking cues from the fact that consumption has been severely hit," he said.

"Lower interest rates combined with this accommodative stance of the Central Bank will aid in rebuilding consumer sentiment, thus consumption (including housing sales),” he said.

The liquidity injection, in turn, will help the real estate sector tide over its worst crisis so far. It is an accepted fact that liquidity influx will help the revival of real estate; it is imperative to do so, given that Real Estate contributes to GDP growth, employment and has a multiplier effect on 250-plus allied industries, said Niranjan Hiranandani is President (National) NAREDCO and Assocham.

“Financial cushion as a result of the loan restructuring will improve cash flows in this liquidity strapped situation, in turn, this will help pump in working capital and funds necessary to restart those projects which are stalled or facing a slowdown since a long period. Cumulative measures by the Centre as also the state governments and regulatory bodies like RBI and RERA will help uplift real estate, which is imperative for economic resurgence,” he added.

“After a series of government policies to keep the real estate industry afloat, RBI’s decision to restructure the financially hit sectors is indeed appreciated. Though in the realty sector, the restructuring will mostly be at a project level, this move will help the sector maintain liquidity, debt serviceability etc., and in turn increase buyers confidence and bring in a favourable turnaround in the sector and put a growth trajectory for the market as well," said Bijay Agarwal, MD, Salarpuria Sattva.         

Kamath Committee in its latest report has given recommendations for 26 sectors that may be factored by lending institutions such as banks while finalizing the loan resolution plans. The very fact that real estate is among these 26 recommended sectors is good per se.

"However, the committee maintains that banks may adopt a graded approach based on the severity of the coronavirus pandemic in a sector. Banks will decide the specifics for loan restructuring. In all, reasonably sound players with good financials will stand to benefit from this move," said Anuj Puri, Chairman - ANAROCK Property Consultants.

 The RBI had formed a five-member committee under the chairmanship of Kamath to make recommendations on the financial parameters to be considered for the one-time restructuring of loans impacted by the COVID-19 pandemic.

It had asked the panel to recommend a list of financial parameters, including leverage, liquidity, and debt serviceability, to decide on the resolution plan. The committee will also vet the resolution plans for all the accounts where the exposure is more than Rs 1,500 crore.

"The recommendations of the Committee have been broadly accepted by the Reserve Bank. Accordingly, a follow-up circular to the Resolution Framework guidelines announced on August 6, 2020, has been issued today by the Reserve Bank specifying five specific financial ratios and the sector-specific thresholds for each ratio in respect of 26 sectors to be taken into account while finalising the resolution plans," the central bank said in a statement.

The committee panel recommended lenders to mandatorily consider total outstanding liabilities/adjusted tangible net worth, total debt/EBITDA, Current Ratio, Debt Service Coverage Ratio, and average debt service coverage ratio.

Signing inter-creditor pact will be mandatory to invoke debt resolution. To assess inter-creditor pact compliance is needed in the supervisory review. Lenders are free to consider other financial parameters in addition to five mandatory ones, the report stated.

It said only those borrower accounts shall be eligible for the resolution which were classified as standard, but not in default for more than 30 days with any lending institution as on March 1, 2020.

According to RBI, the resolution framework may be invoked not later than December 31, 2020, and the plan needs to be implemented within 180 days from the date of invocation.

Moreover, banks may restructure loans of more than Rs 10 lakh crore largely attributed to 5-6 critical sectors, including aviation, commercial real estate and hospitality, that have been severely hit by the Covid-19 outbreak, according to bankers.

The Reserve Bank of India (RBI) has allowed greater leeway to the real estate sector with the highest debt to EBITDA ratio permissible among the 26 sectors it has identified.

While the ratio has been kept at less than or equal to nine for residential real estate, it has been pegged at less than or equal to 12 for commercial real estate. With this move, the real estate sector will get more headroom in terms of financial performance and the projections thereof.
Moneycontrol News
first published: Sep 8, 2020 01:55 pm
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