Few takers for restructuring 2.0 amid demand recovery: Crisil

Mumbai (Maharashtra) [India], August 30 : Barely one per cent of eligible companies in the portfolio of Crisil Ratings have opted for or are contemplating the debt restructuring facility offered by the Reserve Bank of India (RBI) under its resolution framework 2.0, a survey of 4,700 companies shows.
As much as 95 per cent of those opting for or are inclined to seek restructuring belong to the sub-investment grade rating category. Put another way, investment-grade rated corporates are showing high resilience.

In particular, most of the micro and small enterprises in India are unrated.

The RBI announced the scheme on May 5 for borrowers including individuals, small businesses, and micro, small and medium enterprises (MSMEs) with aggregate exposure of up to Rs 25 crore provided they had not availed of benefits 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.
On June 4 this year, the RBI raised the aggregate debt threshold to Rs 50 crore from Rs 25 crore.

This increase in threshold led to about two-thirds of the Crisil-rated mid-sized companies becoming eligible for the restructuring 2.0 scheme. The fact that only a handful of companies are exploring the restructuring option could be reflective of a relatively improved business outlook accompanying a pick-up in economic activity in the aftermath of the pandemic's second wave.

Subodh Rai, Chief Ratings Officer at Crisil Ratings, said the quick recovery in demand after moderation during second Covid-19 wave and sanguinity around economic growth have led corporates to give the restructuring option a miss.
"The more localised and less stringent nature of curbs/restrictions during the second wave has meant relatively lower disruption in business activities compared with the first wave. So the muted response is par for the course," he said.

Crisil Ratings' investment grade rated corporates have shown strong resilience amid the pandemic and hardly anyone is planning to avail restructuring 2.0. In fact, 95 per cent of companies which have opted or showing inclination for restructuring 2.0 are rated in sub-investment grade rating category.
Within these, four out of five are rated in the B or lower rating categories, clearly indicating that only companies with weak credit quality are exploring restructuring.

Nitin Kansal, Director at Crisil Ratings, said most of the companies that have opted for or are contemplating restructuring 2.0 belong to the low-to-medium resilience sectors such as hospitality, educational services, textiles, construction and gems and jewellery.
Demand recovery in some of these remains uncertain because of the continuing overhang of the pandemic, he said.

Any weakening of sentiment around recovery and a likely third wave leading to fresh curbs on economic activity will influence more companies to seek restructuring 2.0. This could be especially true for the smaller ones that typically experience more stress.
Greater clarity will emerge closer to the September 30 deadline set by the RBI for invoking restructuring plans, said Crisil.