India: RBI Regulatory Package For COVID-19 | Frequently Asked Questions

On March 27, 2020, to mitigate the impact of COVID-19 on the financial market, the Reserve Bank of India (the "RBI") announced a regulatory package (the "Regulatory Package"). Among other measures, the Regulatory Package allows for a specific moratorium on the repayment of debt, relaxation of certain norms for working capital facilities, and infusion of liquidity into the financial market.

Regulatory Package grants a 'Moratorium' – What is it, and to whom does it apply?

The RBI has permitted all commercial banks, including regional rural banks, co-operative banks, all-India financial institutions, non-banking finance companies ("NBFCs") and housing financing companies (together, the "Financial Institutions") to grant a moratorium for up to 3 months on the payment of all principal, interest and repayment instalments between March 1, 2020 and May 31, 2020 ("Moratorium Period") to their borrowers ("Moratorium"), for all term loans, including credit card dues. For working capital facilities sanctioned as cash credit or overdraft facility, the RBI has permitted the Financial Institutions to grant a moratorium only on the payment of interest during the Moratorium Period.

What is the impact on term loans during the 'Moratorium'?

If any Financial Institution, at the request of a borrower, grants to the borrower the Moratorium for a term loan, then the borrower will not be required to pay the amount due to the Financial Institution during the Moratorium Period. Consequently, the repayment schedule for such a loan account will be extended by 3 months and the amounts payable during the Moratorium will be repaid during the extended period.

What happens to working capital facilities under the 'Moratorium'?

If any Financial Institution, at the request of a borrower, grants the Moratorium for a working capital facility to the borrower, then the borrower will not be required to pay the interest during the Moratorium Period. Further, the Financial Institutions are allowed to recalculate the 'drawing power' by reducing the margins or reassessing the working capital cycle.

What is the difference between 'Moratorium' for term loans and for working capital facilities?

With respect to term loans, the Moratorium defers all instalments, including the interest payable during the Moratorium Period for all the term loans, and all of the interest accumulated during the Moratorium Period can be paid at the end of the repayment schedule, over a period of 3 months.

For working capital facilities, the Moratorium only suspends the interest payment during the Moratorium Period, and the interest accrued during the Moratorium Period, along with the interest for the period ending June 30, 2020, shall be payable on June 30, 2020 or the next interest date for the relevant working capital facility.

If a borrower avails the 'Moratorium', can there be an asset reclassification (SMA or NPA)?

In the Regulatory Package, the RBI has stipulated that if a Financial Institution grants the Moratorium to a borrower, it will not constitute a reclassification of an asset. For term loan accounts, which enjoy the Moratorium, any asset reclassification, such as special mention accounts ("SMA") or non-performing assets ("NPA"), will be based on the revised repayment schedule. Similarly, for working capital facilities, the asset classification will be evaluated based on the payment of interest which accrued during the Moratorium Period, immediately after May 31, 2020 and on the adherence to other payment terms.

But does the 'Moratorium' allow a freeze of the clock on asset classification of any sub-standard loans before March 01, 2020?

Under the Regulatory Package, the RBI has not explicitly allowed freezing of clock on any loan account which was categorized as 'sub-standard' before March 01, 2020. However, on April 06, 2020, the High Court of Delhi in the matter of Anant Raj Limited vs. Yes Bank, opined that, given the measures rolled out by the RBI to ease the financial stress on borrowers, the intention was to maintain status quo for classification of the loan accounts as of March 01, 2020. In effect, the High Court of Delhi has allowed freezing of the clock on the asset classification of any sub-standard account under the Regulatory Package.

More importantly, the High Court of Delhi stated that the RBI has restricted any change in asset classification during the Moratorium Period. Accordingly, if a borrower's account was non-standard before March 01, 2020, then such account cannot be further downgraded. Further, if the borrower fails to pay the overdue amount before March 01, 2020 for a sub-standard account during the Moratorium Period, such non-payment of the overdue amount cannot trigger any downgrade of the asset. In a nutshell, the status quo for the classification as sub-standard has to be maintained. Consequently, there will be a deferment of all payments during the Moratorium Period. However, any interest and applicable penal charges will continue to accrue on the overdue instalment even during the Moratorium Period. If, after the Moratorium Period, the borrower fails to immediately pay the overdue instalment along with the accrued interest and applicable penal charges, the classification of the loan asset would then automatically migrate as per the Income Recognition and Asset Classification Guidelines.

Due to the 'Moratorium', will there be a relief as far as reporting of default to any Credit Rating Agency is concerned?

Under the Regulatory Package, any default on payment which was due at any time during the Moratorium Period will not be reported to credit bureaus in India or to the Central Repository of Information on Large Credits (CRILC). Similarly, the Securities and Exchange Board of India (SEBI) has allowed Credit Rating Agencies (CRAs) to not consider any delay as a default by listed companies if such default is owing to the lockdown to contain the outbreak of COVID-19.

Will there be an impact on contracts and contractual obligations under the current financing documents?

Typically, a financing facility provides for a material adverse effect, popularly known as 'MAE', as a trigger for an event of default. Lenders generally negotiate an expansive definition of MAE which includes any event that has a material adverse effect on the business of the borrower. In some instances, the borrower can negotiate measurable thresholds; for example, the impact on revenue or drop in profit as carveouts to MAE clauses.

Undoubtedly, COVID – 19 has already brought large swaths of the world's economies to a grinding halt through the lockdown, and the financial markets have entered recessionary territory. As a result, the future cash flows of many businesses will get negatively impacted, which may trigger MAE in a financing facility, subject to its terms and conditions.

Can borrowers take shelter under the general legal concept of 'Force Majeure' to avoid payments to the Financial Institutions?

Generally, lenders do not favour a 'Force Majeure' clause in their financing documents, since it may allow a borrower to avoid its payment obligations. In the absence of an explicit 'Force Majeure' clause, which squarely covers a situation like COVID-19, it may not be possible to argue any implicit 'Force Majeure'. For a more detailed understanding of a 'Force Majeure' clause, please see the following link: https://induslaw.com/app/webroot/publications/pdf/alerts-2020/Infolex-Frequently-Asked-Questions-Force-Majeure-March28-2020.pdf.

Does the Regulatory Package cover relief from any margin call or replenishment of security or collateral for a financing facility during the Moratorium Period?

The COVID-19 pandemic has already upended one of the longest bull-runs in the stock market, with recession looming large. All these factors have a cascading impact on the valuation of assets. In a secured financing transaction, the security package may have a variety of assets such as shares, immovable properties and moveable assets. If the security depletes, a lender can typically ask a borrower to replenish the security. If the borrower fails to replenish the security, it will constitute an event of default, which entitles the lender to accelerate all payments under the facility and enforce any security.

Generally, Indian courts have allowed lenders to enforce the security if the borrower fails to meet the margin call or replenish the security and have refused to issue injunctions against lenders for the enforcement of any security. Recently, in Rural Fairprice Wholesale Limited & Anr v. IDBI Trusteeship Services Limited & Ors, the High Court of Bombay restrained a lender from selling the promoter's shares pledged to the lender. In this case, the borrower argued that the shares of the company plummeted as the financial markets skidded on fears of the COVID-19 pandemic. In this context, the High Court of Bombay held that Rural Fairprice Wholesale Limited, and its group companies, required protection from such enforcement acts during such disrupting times and barred IDBI Trusteeship Services Limited, which acted on behalf of the lender, from invoking the pledged shares. The court has scheduled the next hearing on May 4, 2020.

It will be interesting to see if other courts follow suit. If so, this will protect promoters who had pledged a significant part of their equity shares to lenders to raise financing.

Is this 'Moratorium' applicable to NBFCs and other fintech lenders?

There seems to some ambiguity on whether the Regulatory Package applies to the loan facilities availed by NBFCs and shadow banking institutions from scheduled commercial banks. Notably, the Indian Banks Association (the "IBA") and the RBI, in their FAQs released on April 01, 2020, have stated that although the Moratorium on term loans is available to all borrowers including NBFCs, working capital loans extended to NBFCs will not be eligible.

Further, the State Bank of India, in its FAQs on the Regulatory Package, has clearly stated that none of the NBFCs, micro-financial institutions (MFIs) and other financial institutions is eligible for the Moratorium, and these institutions may be offered funding under the targeted long-term repo operations (the "TLTRO"), if there are any cash flow issues.

This ambiguity has engendered panic among all shadow banking institutions since they fear that only highly-rated NBFCs will receive funding under TLTRO from the RBI. At the same time, they will still be liable to repay their dues without the Moratorium. If the shadow banking institutions are not allowed to avail the Moratorium for their loans, they may not be inclined to offer the Moratorium to their borrowers under the Regulatory Package, as it would create an asset-liability mismatch (ALM) problem. And, worse yet, if the shadow banking institutions do not provide the Moratorium to their borrowers, who will be unable to repay during the Moratorium Period, it will create a risk of asset classification downgrade (SMA or NPA) and proper provisioning in their books.

How has COVID-19 impacted the IBC?

On March 24, 2020, the Minister of Finance and Corporate Affairs, Nirmala Sitharaman, announced several financial incentives to ensure the smooth functioning of the Indian financial market. As part of the incentive-package, she also announced that under Section 4 of the Insolvency & Bankruptcy Code, 2016 (the "IBC"), the Central Government had increased the threshold limit of default to Indian Rupees 1 crore (approximately USD 131,000) from the existing threshold of Indian Rupees 1 lakh (approximately USD 1,300), for triggering the corporate insolvency resolution process (CIRP) to protect businesses from unwarranted insolvency proceedings. Further, Sitharaman also suggested that if the COVID-19 crisis continues beyond April 30, 2020, the Central Government may suspend Sections 7, 9 and 10 of the IBC for 6 months to shield businesses from insolvency proceedings from any creditor.

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