Introduction
The Reserve Bank of India (RBI), with a view to soften the COVID-19 blow on the industry, has recently introduced a slew of measures to maintain the liquidity levels for the lending institutions and the borrowers.
Moratorium of 3 (three) months
Vide its press release dated March 27, 2020, RBI released a Statement on Developmental and Regulatory Policies (“Statement on Policies”) which permits the lending institutions to provide a 3-month moratorium on repayment on all term loans. Vide Circular No.DOR.No.BP.BC.47/21.04.048/2019-20 dated March 27, 2020 issued in pursuance of the Statement on Policies, RBI has clarified a host of issues and stated that the moratorium shall be applicable in respect of all term loans (including agricultural term loans, retail and crop loans) and all lending institutions governed by the RBI.
The 3-month moratorium will be applicable for payments of all instalments falling due between March 1, 2020 and May 31, 2020, including:
(i) principal and/or interest components;
(ii) bullet repayments;
(iii) equated monthly instalments; and
(iv) credit card dues.
The repayment schedule(s) for such loans and the residual tenor, will be shifted across the board by 3 (three) months after the moratorium period. However, interest will continue to accrue on the outstanding portion of the term loans during the moratorium period.
Accordingly, provided the relevant lending institution opts to provide such flexibility to its borrowers, during the moratorium period, the borrower will not be obligated to pay any amount to the lending institution.
Working Capital
In respect of working capital facilities sanctioned in the form of cash credit/overdraft, the lending institutions are permitted to defer the recovery of interest applied in respect of all such facilities during the period from March 1, 2020 up to May 31, 2020. However, the accumulated accrued interest for the moratorium period has to be recovered immediately after the completion of this period.
The lending institutions may recalculate the ‘drawing power’ in respect of working capital by reducing the margins and/or by reassessing the working capital cycle. This relief will be available in respect of all such changes effected up to May 31, 2020 and will be contingent on the lending institutions satisfying themselves that the same is necessitated on account of the economic fallout from COVID-19 pandemic. Further, accounts provided relief under these instructions will be subject to subsequent supervisory review with regard to their justifiability on account of the economic fallout from COVID-19 pandemic.
Policies only permissive
It is also pertinent to note that the aforesaid directives issued by the RBI are only permissive in nature and are not mandatory. The lending institutions may frame polices for providing the above-mentioned reliefs to all eligible borrowers. Further, RBI has also specified that the Board of Directors and the key management personnel of the lending institutions shall ensure that all instructions are properly communicated down the line in their respective organisations, and clear instructions are issued to their staff regarding the implementation.
Classification as Special Mention Account (SMA) or Non-Performing Asset (NPA)
Since the moratorium/deferment is being provided specifically to enable the borrowers to tide over the economic fallout from COVID-19 pandemic, the same will not be treated as concession or change in terms and conditions of loan agreements due to financial difficulty of the borrower under paragraph 2 of the Annex to the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 dated June 7, 2019. Consequently, such a measure, by itself, shall not result in asset classification downgrade.
The asset classification on term loans which are granted the reliefs will be determined basis the revised due dates and revised repayment schedule.
Similarly, for working capital facilities where such reliefs are provided, the SMA and out of order status will be evaluated considering the application of accumulated interest immediately after the completion of the deferment period as well as revised term.
Other terms and conditions
The rescheduling of payments, including interest, will not qualify as a default for the purposes of supervisory reporting and reporting to Credit Information Companies (CICs) by the lending institutions. CICs to ensure that the actions taken by lending institutions do not adversely impact the credit history of the beneficiaries.
Key Takeaways
· Statement on Policies are only applicable to term loans and loans availed for working capital from the lending institutions.
· Statement on Policies would not extend to any debt extended by entities governed by regulators other than RBI.
· This is merely a deferment of repayments of term loan facilities and working capital facilities and ‘is not a waiver of payments for any period’ and borrowers shall continue to be under an obligation to make these payments to the lending institutions.
· Interest accrued during the moratorium period would still have to be paid by the borrowers upon the expiry of moratorium period.
· A very welcome step by the RBI given the unprecedented nature of effects of COVID-19 pandemic and the uncertainty surrounding the global and Indian economic scenario.
In light of the above, a borrower should avail of the reliefs only if it does not have adequate cash flows to continue repayments due to the COVID-19 lock-down. If the borrower has cash flows to service the loans, the borrower may opt to continue servicing the loans without availing the reliefs granted by the lending institutions as availing such reliefs would extend the tenor of the loan and increase the interest burden.
Disclaimer – The views and opinions expressed in this article are those of the authors and the article is meant for informational purpose only and does not purport to be an advice or opinion. The views and opinions expressed in this article are based on the information available as on March 31, 2020.
Sajit Suvarna is a Partner; Saloni Mody is an Associate Partner; Preeti Kumari is a Senior Associate and Twara Kamdar is a Senior Associate with DSK Legal and are part of the Real Estate team.