In view of the COVID-19 pandemic, the Monetary Policy Committee (MPC) decided to advance its scheduled meetings and undertook a careful evaluation of the current and evolving macroeconomic and financial conditions, Based on the aforesaid, a Statement on Developmental and Regulatory Policies ("Policy") was made by the Governor of the Reserve Bank of India ("RBI") on 27th March 2020 and Circular No.DOR.No.BP.BC.47/21.04.048/2019-20 was issued shortly thereafter.
A significant take away from the Policy besides the very important induction of liquidity into the economy is the 3 month extension is given to borrowers and lenders alike. This article seeks to discuss the implications of Policy changes.
Briefly stated, lending institutions governed by the RBI have been permitted to allow a moratorium of three months on payment of installments in respect of all term loans outstanding as on March 1, 2020. We look at the conditions relating to the application of the Policy.
All RBI governed Lending Institutions
Lending Institutions has been defined to include all those banks and institutions regulated by the RBI including NBFCs and HFCs. However, these do not include AIFs, Mutual Funds or Insurance Companies covered by other regulators like SEBI and IRDA. Therefore, exposures to these institutions will not fall within the said Policy framework and the borrowers will have to make applications on the ground of Force Majeure to temporarily suspend its payment obligations temporarily on grounds of impracticability of performance. So the RBI has effectively prevented multifarious litigation in genuine cases and hopefully, the other Regulators will follow suit.
3 months - begin retrospectively from 1st March
The 3 month period has begun on the 1st of March itself. It applies to all installments falling due between 1st March 2020 and 31st May, 2020.
This Policy is therefore available retrospectively for all outstanding as on 1st March, 2020 and will help lenders and banks tide over the year-end without harsh write-offs on balance sheets and consequent enforcement actions. This effectively means that even if enforcement action had been initiated after 1st March, 2020, in genuine cases, a Lending Institution may consider giving a genuine borrower, the benefit of this Policy.
Option given to the Lending Institutions
First, this Policy in the nature of a permission to Lending Institutions to defray recovery of monies due between 1st March and 31st May of 2020. It is not a directive or mandate. The Lending Institutions will of course have to conduct business in accordance with the policy
The lending Institutions are accordingly required to put in place a Board approved policy in this regard so as to implement the Policy requirements.
Ofcrouse, the Lending Institutions will need to study applications made by the Borrower in genuine cases in order for the extension to be given in terms of the Policy. The Circular clearly states that the regulatory measures have been announced to mitigate the burden of debt servicing brought about by disruptions on account of COVID-19 pandemic and to ensure the continuity of viable businesses. Therefore, where no such viability is established, such businesses need not get the benefit of the policy measures.
What are loans?
The circular has broken up loans into term loans and working capital facilities. It does not seem as though the definition of the loans were in any manner sought to be restricted given the social purpose underlying the Policy i.e. providing for borrowers to tide over the economic fallout from COVID-19.
The Circular itself clarifies that these may include agricultural term loans, retail and crop loans and that it is intended to cover principal and/or interest components; bullet repayments; Equated Monthly Instalments; and credit card dues.
Generally speaking, 'Term Loan' means a loan which is repayable after a specified term period[i]. It may be in the nature of a Working Capital Term Loan (WCTL) or a Funded Interest Term Loan (FITL). In our view, these loans would include even those given in the form of debentures subscribed by the Lending Institution.
Of course, instruments purchased in the course of treasury management may not fall within the gaps and may not get the benefit of the Policy.
Working capital facilities are those in the form of cash credit/overdraft as distinguished from Working Capital Term Loans. Also, credit card payments have been regarded as Term Loans and not working capital facilities. Basically it seems that everything other than treasury instruments and working capital facilities is to be regarded as term loans so long as these are payable at the end of a fixed tenor.
Term Loans - It's a Moratorium not a Waiver
The Lending Institutions have been permitted to allow a moratorium of three months on payment of installments in respect of all term loans. Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, have been permitted to be shifted across the board by three months.
However, it does not mean that the Lending Institutions will be expected to write off the interest amount and the interest will continue to accrue during the moratorium. Also, provisions for levy of interest (albeit at non-penal rates) may well be imposed by those institutions for the delay in payment, however, having regard to the overall economic position and the recent decrease in interest rates.
The Lending Institutions may not be in a position to demand the payment of the whole of the accrued interest immediately at the end of the moratorium but will be in a position to recalibrate and redistribute the interest payments in future months without any write down in their books.
Deferment of Interest on Working Capital Facilities
In respect of working capital facilities sanctioned in the form of cash credit/overdraft, lending institutions are being permitted to allow a deferment of three months on payment of interest in respect of all such facilities outstanding as on March 1, 2020.
The accumulated interest for the period will be paid after the expiry of the deferment period.
The Lending Institutions are protected by providing that the moratorium on term loans and the deferring of interest payments on working capital will not be treated as change in terms and conditions of loan agreements due to the financial difficulty of the borrowers and, consequently will not result in asset classification downgrade.
Dhaval Vussonji & Prachi Dave are Managing Partners at DV Associates.
[i]Master Direction DBR.Dir. No.85/13.03.00/2015-16
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