Half of CRISIL-rated mid-sized companies¹ will be eligible for the restructuring window offered under the Resolution Framework 2.0 announced by the Reserve Bank of India (RBI). Companies with relatively weaker credit profiles, and part of low-resilience sectors² are expected to benefit more from the scheme.

Amid COVID resurgence, the RBI, on May 05, 2021, announced a slew of measures to mitigate impact of the pandemic on the businesses and individuals, including restructuring window for small businesses.

As per the announcement, borrowers including individuals, small businesses and MSMEs having aggregate exposure of up to ₹25 crore would be eligible for consideration under the Resolution Framework 2.0 provided they have not availed of restructuring under any of the earlier restructuring frameworks (including Resolution Framework 1.0 dated August 6, 2020), and were classified as standard accounts as on March 31, 2021.

Though localised at the moment, disruptions caused by the second wave of the pandemic have the potential to hit smaller businesses, which were yet to fully recover from the blow dealt by the first wave. The restructuring would entail rescheduling of their financial obligations, thereby easing liquidity pressure.

CRISIL rates about 6,800 mid-sized companies (excluding financial sector entities). Of these ~3,500 are small and medium enterprises (SMEs), having bank loan exposure of up to ₹25 crore. About 3,400 of them are standard accounts, which makes them eligible to avail of the restructuring. (Please refer Annexure)

Says Subodh Rai, Chief Ratings Officer, CRISIL Ratings Ltd, “The RBI’s intervention is timely and companies with weaker credit profiles will benefit more from the restructuring scheme. Four out of five companies eligible for restructuring have sub-investment category ratings, indicating their relatively weak ability to manage liquidity shocks. Restructuring 2.0 could provide interim liquidity relief to these companies to cope with near-term cash-flow mismatches.”

Last fiscal, a third of the aforesaid SMEs had cushioned their liquidity by availing of the RBI moratorium on bank loans. This relief was complemented by a bounce back in demand, which limited the number of companies that had opted for restructuring under the Resolution Framework 1.0.

With the resurgence of the pandemic and absence of any moratorium window this time round, their resilience will be tested. However, CRISIL Ratings believes that the impact of pandemic could be contained over the next 2-3 months. Therefore, actual number of companies opting for restructuring could be much lower than that are eligible.

CRISIL Ratings also analysed the impact of the proposed restructuring on a sectoral basis, categorising 43 sectors (excluding the financial sector) into three categories – high, moderate and low resilience.

Says Rahul Guha, Director, CRISIL Ratings Ltd. “Companies in low-resilience sectors such as retail, hospitality, auto dealerships, travel and tourism, and residential real estate are likely to be impacted the most by resurgence of the pandemic, and therefore more likely to opt for the restructuring. On the other hand, companies in high-resilience sectors such as chemicals, pharmaceuticals, dairy, information- technology and consumer staples/FMCG may not face any significant liquidity pressures on account of steady consumer demand and will be least likely to go for restructuring.”

CRISIL Ratings will assess the impact of restructuring 2.0 on its rated credits on a case-to-case basis after factoring in the timeliness and terms of the restructuring of debt, as sanctioned by the respective lenders and regulatory guidelines.

If the impact of the second wave of the pandemic is not contained over the next 2-3 months, more restructuring may be necessitated. This will bear watching.

¹ Mid-sized companies – having aggregate bank loan exposure of less than ₹500 crore
² Sectoral resilience measures ability to withstand future disruptions/shocks. It is based on category of goods (essential/ non-essential); nature of demand (discretionary or non-discretionary); balance sheet strength in terms of leverage and liquidity available for entities in the sector; and the level of government/ regulatory support to the sector. (For further details, please refer to CRISIL Ratings' report titled 'Guarded optimism amid pandemic resurgence', dated April 2, 2021)