India Bullion and Jewellers Association Suggests Ratio Adjustments for One Time Restructuring

Mumbai, Maharashtra, India:  A year after the pandemic induced lockdown was imposed across India, industries are still struggling to cope with its adverse effects. Acknowledging the challenges being faced by industries to service their loans, a One Time Restructuring was announced by the Reserve Bank of India as per recommendations by the V.K Kamath Committee. The VK Kamath Committee identified ‘Gems & Jewellery’ as a sector affected by Covid-19 and made blanket recommendations for restructuring of loans under this category. However, two parameters along which the lenders have been advised to track the Gems and Jewellery Loans are proving counter productive for borrowers of Gold (Metal) Loans (GML), which is a unique financial product used for inventory financing. It is observed that Covid OTR has failed to address its nuances and in effect has increased the hardships for such borrowers, contrary to the intended objective.

The India Bullion and Jewellers Association (IBJA) suggests the following adjustments to ratios along which the lenders have been advised to track loans for the sector:

1. Increasing Total Outstanding Liabilities/ Adjusted Tangible Net Worth ratio requirement from <=3.5 to < =7

Jewellers carry a higher level of debt and with net worth getting eroded, we are afraid that compliance with RBI’s stringent benchmarks as per their circular of 07.09.2020 with regard to TOL/TNW being <= 3.5 at the time of implementation may be impracticable. It may be prudent to point out that any reduction in the total debt of GML borrowers would be tantamount to a reduction in the inventory level. This would mean a ‘shrinking’ of the business, resulting in job losses in this sector, which should be avoided. Instead, it is imperative to enable borrowers to maintain the historically sanctioned margin levels and debt thereof, by increasing the TOL/TNW to =7 by 31.03.2023.

2. Increasing Total Debt/EBITDA from 5 to 20 or at least 15

The parameter recommended by the Expert Committee of Total Debt/EBITDA to be 5xEBITDA may not be very possible to achieve for the GML borrowers. The GML attracts an interest rate of 2.5-4% per annum. When juxtaposed against Working Capital Limits, (WCL), which attract an interest rate of 12-14% per annum, it is obvious that the ability to service interest of GML borrowers is 4x, (four times), more as compared to WCL borrowers.

As the gold jewellery industry has EBITDA margins which are quite low, thus the stipulation of ratio of Total Debt/EBITDA <= 5.0 is seemingly impracticable. Due to the low interest rate of the GML, the ability to service the interest is much higher for GML borrowers as compared to the WCL borrowers. For the benefit of the OTR to reach the GML borrowers, this ratio must be revised to TOTAL DEBT= 20xEBITDA or at least 15x EBITDA.

“While the gems and jewellery industry has been included for relief under the Kamath Committee, recommendations need to be revised urgently, so that the respite may reach the industry, as has been desired by the Hon’ble PM. Few changes in the ratios prescribed for OTR can make it more effective and we are hopeful that the RBI shall consider the same.”- Mr. Prithviraj Kothari, National President, IBJA.

The move to provide for one-time restructuring was a most welcome move, however, while 26 sectors have been identified for relief under the OTR, representations were only sought from 3 sectors. Thus, 23 sectors have been prescribed relief without taking any representation from them, which is an anomaly. Urgent intervention and well informed and timely revisions in the parameters can salvage the situation and bring the intended respite for industry players. We are hopeful that RBI will consider the matter earnestly.

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