The Reserve Bank of India (RBI) as part of its Statement of Development and Regulatory Policies released on 27 March 2020 announced a slew of measures to safeguard the Indian economy from the shocks of the COVID-19 pandemic. As part of these measures, the RBI released a circular (Ref: RBI/2019-20/ 186 DOR.No.BP.BC.47/21.04.048/2019-20) on COVID-19 – Regulatory Package (COVID Regulatory Package) to, inter alia, mitigate the burden of debt servicing brought about by disruptions on account of COVID-19 pandemic and to ensure business continuity for viable enterprises.
Key highlights of COVID Regulatory Package are set out below:
Rescheduling of Payments – Term Loans and Working Capital Facilities: All lending institutions i.e. commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, All-India Financial Institutions and Non-Banking Finance Companies (NBFCs) (including housing finance companies and micro-finance institutions) have been permitted to allow a moratorium of three months on debt servicing in respect of all term loans outstanding falling due between 1 March 2020 to 31 May 2020 (Moratorium Period). The moratorium is applicable only with respect to repayments, and interest will continue to accrue on the outstanding portion of the term loans during the Moratorium Period. RBI has clarified that the permission to extend moratorium not only extends to loans availed by corporates but also to facilities extended across the board, including agricultural term loans, crop loans and retail loans and to all form of instalments, including equated monthly instalments, bullet repayments and even credit card dues.
Further, in respect of working capital facilities sanctioned in the form of cash credit/overdraft facilities, the lending institutions have been permitted to defer payment of interest during the Moratorium Period. However, the RBI has also clarified that this facilitation is only in the form of a temporary deferment and the accumulated accrued interest shall become payable immediately after the Moratorium Period.
While the RBI has permitted commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks (including state co-operative banks/ district central co-operative banks), All-India Financial Institutions and NBFCs (including housing finance companies and micro-finance institutions) to grant a moratorium on debt servicing, lending institutions such as overseas lenders, bond holders, asset reconstruction companies, mutual funds, alternative investment funds, counterparties to derivative transactions etc. do not seem to have been covered under the COVID Regulatory Package. It remains to be seen how debt availed from these institutions are treated by the regulators and to that extent, the risk of a cross-default trigger remains.
Easing of Working Capital Financing: For those borrowers facing stress on account of the economic fallout of the pandemic, the lending institutions have been permitted to recalculate the drawing power of the borrowers by reducing margins and/or by reassessing the working capital cycle for the borrowers upto 31 May 2020. However, the lending institutions have the obligation to assess the necessity of such a readjustment/ recalculation and the borrower accounts to which such relaxation may be offered will need to be subjected to subsequent supervisory review as regards the justifiability of the relaxation on account of economic fallout on the business.
In the COVID Regulatory Package, while the RBI has addressed debt servicing issues with respect to term loans and working capital loans, debt availed through non-convertible debentures has not been specifically addressed and the boards of each lending institutions may consider whether the treatment of debt availed through non-convertible debentures would be akin to that of term loans by virtue of both being term debt instruments.
Classification of Special Mention Account and Non-Performing Assets: In terms of RBI's - Prudential Framework for Resolution of Stressed Assets) Directions, 2019 dated June 7, 2019 (7 June Circular), restructuring is an act, whereby a lender, considering the financial difficulties (indicators whereof are set out in Annexure 2 of the 7 June Circular) of the borrower, agrees to/ offers a concession or modification of terms and conditions of the credit facilities, including inter alia, modification of payment/ repayment period or instalments or interest. However, considering the special circumstances, the RBI has clarified that the dispensation offered under the COVID Regulatory Package (in the form of moratorium/ deferment/ recalculation of drawing power) will not be considered as a concession or change in terms and conditions of the loan agreements on account of a 'financial difficulty'. Therefore, the moratorium/ deferment/ recalculation will not be deemed to a restructuring that requires asset classification.
Going forward, any asset classification of the accounts will be determined basis the revised due dates and the repayment schedule after the deferment/ Moratorium Period. As regards the cash credit/ overdraft facilities, where aforesaid relief is provided, the special mention account status and the out of order status shall be evaluated basis the application of accumulated interest immediately at the end of the deferment period as well as basis the recalculation of drawing power, if any.
Further, any non-payment of instalments during the Moratorium Period are not to be construed as defaults for the purposes of supervisory reporting by the lending institutions and the Credit Information Companies have also been mandated to ensure that the deferral/non-payment should not affect credit history of the borrowers.
Board Approved Policy: While the RBI has permitted lending institution to extend these relaxations, lending institutions are required to frame board approved policies detailing the contours of the reliefs to be offered by them, which shall include, inter alia, the objective criteria for extending any reduction of margin/ reassessing working capital cycle for readjusting drawing power. The board approved policy is required to be disseminated in the public domain and be implemented by the lending institutions immediately.
The RBI has recognized the imminent stress that the borrowers and in turn the banking industry is bound to face due to the COVID-19 pandemic and as such the COVID Regulatory Package comes at a very opportune time, offering a breather to the financing players as well as to the borrowers across the spectrum. The lending institutions will now need to quickly put in place a board approved policy to implement the COVID Regulatory Package and any such policy should clearly set out the criteria for dispensation and how the lending institutions will pass on the benefit to the borrowers. This, along with the recent increase in the default threshold (from INR 1,00,000 to INR 1,00,00,000) under Insolvency and Bankruptcy Code, 2016, would go a long way in reducing enforcement/ recovery pressure on borrowers, at a time when the economy appears to be headed for prolonged disruption and financial stress.
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