Did COVID-19 impact your business financially? Were you worried about loan repayment and possible NPA classification? Well, you’re not alone! The pandemic put immense financial stress on businesses and borrowers across India, leading RBI to introduce a special Resolution Framework to prevent widespread financial instability.
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👉 Watch the full video to get a complete breakdown of RBI’s framework and ensure you don’t miss out on potential relief measures.
Before we dive in, watch this video for a complete breakdown:
Understanding RBI’s Resolution Framework
🔹 What is RBI’s Resolution Framework?
- Launched on 6th August 2020 to provide relief to borrowers affected by COVID-19.
- Aims to prevent financial instability and widespread NPA classification.
- Applies to corporate and MSME borrowers with financial difficulties due to the pandemic.
🔹 Why Was This Framework Needed?
During the COVID-19 pandemic, many businesses faced operational shutdowns, revenue losses, and liquidity crises. Banks were witnessing a surge in non-performing assets (NPAs), which posed a threat to the entire financial system. The RBI introduced this framework to stabilize the economy and offer viable solutions to distressed borrowers.
🔹 Eligibility Criteria for Borrowers
- Loan account must be standard as of 1st March 2020 (No major defaults before COVID-19).
- No default of more than 30 days as of 31st March 2020.
- Resolution invocation deadline: 31st December 2020.
- Implementation within 180 days (by June 30, 2021, at the latest).
🔹 Key Features of the Resolution Plan
- Loan rescheduling – Extending repayment tenure to ease financial burden.
- Debt restructuring – Adjusting loan terms based on borrower’s repayment ability.
- Change in ownership/management – If required, to revive financially stressed companies.
- Loan exposure takeover by another bank or financial institution.
🔹 Role of the K.V. Kamath Committee
To ensure structured and fair resolution, RBI formed the K.V. Kamath Committee, which provided 5 key financial ratios that borrowers must meet post-restructuring:
- Total Debt to EBITDA Ratio – Assessing debt servicing capability.
- Current Ratio – Indicates liquidity strength.
- Debt Service Coverage Ratio (DSCR) – Ensures sufficient cash flow for repayments.
- Average DSCR (ADSCR) – Long-term viability measure.
- Total Outside Liability to Adjusted Tangible Net Worth – Determines financial stability.
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Conclusion: What This Means for Borrowers & Banks
The RBI’s Resolution Framework for COVID-19 stress was a critical relief measure for borrowers struggling with repayments. If your loan qualifies, restructuring could help you avoid NPA classification and ease your repayment burden.
🔹 Key Takeaways:
- Resolution invocation deadline was 31st Dec 2020, implementation by June 30, 2021.
- Meeting financial ratios set by the Kamath Committee was crucial for restructuring.
- DCCO delays beyond the allowed period result in NPA downgrade.
- NPA sales & auction rules ensure maximum recovery for banks.
💬 What’s your take on RBI’s framework? Drop your thoughts in the comments!
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