On March 27, 2020, the Reserve Bank of India (“RBI”) issued a Statement on Development and Regulatory Policies (“Statement”) in order to address the financial stress caused by COVID-19 pandemic. The policies set out in it pertained to liquidity management, strengthening the monetary transmission, relaxing repayment pressures, improving access to working capital and improving the functioning of markets.
In pursuance of the Statement RBI, inter alia, issued the COVID-19 – Regulatory Package (“Regulatory Package”) setting out the instructions to banks, all-India financial institutions and non-banking financial companies including housing finance companies (“Lenders”) in order to mitigate the burden of debt servicing.
Rescheduling of payments:
In terms of the Regulatory Package, Lenders are permitted to grant a moratorium of 3 (three) months on payment of all instalments falling due between March 1, 2020 and May 31, 2020. The repayment schedule for such loans as well as the residual tenor, will be shifted across the board by 3 (three) months after the aforesaid moratorium period. However, interest will continue to accrue on the outstanding portion of the term loans during the aforesaid moratorium period.
In respect of cash credit/ overdraft facilities, Lenders are permitted to defer the recovery of interest applied in respect of such facilities during the period from March 1, 2020 up-to May 31, 2020. The accumulated accrued interest will be recovered immediately after the completion of the aforesaid period.
Easing of working capital financing:
In respect of cash credit/ overdraft facilities sanctioned to borrowers facing stress on account of the economic fallout of the pandemic, Lenders may recalculate the ‘drawing power’ by reducing the margins and/ or by reassessing the working capital cycle. The aforesaid relief will be available in respect of all such changes effected up to May 31, 2020 and the accounts which are provided such relief will be subject to subsequent supervisory review with regard to their justifiability on account of the economic fallout from COVID-19.
Asset classification:
The moratorium/ deferment/ recalculation of the ‘drawing power’ as mentioned above will not be treated as a concession or a change in terms and conditions of loan agreements due to financial difficulty of the borrower for the purposes of the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019.
Accordingly, such measures, by itself, will not result in downgrade of asset classification.
The asset classification of term loans which are granted relief as mentioned above will be determined on the basis of the revised due dates and the revised repayment schedule. Similarly, working capital facilities where relief is provided as mentioned above, the SMA and the out of order status will be evaluated considering the application of accumulated interest immediately after the completion of the permitted deferment period as well as the revised terms.
The rescheduling of payments, as aforesaid, will not qualify as a default for the purposes of supervisory reporting and reporting to credit information companies (“CICs”) by the Lenders. CICs are required to ensure that the actions taken by the Lenders pursuant to the Regulatory Package do not adversely impact the credit history of the beneficiaries.
Other Compliances:
Lenders are required to frame Board approved polices for providing the reliefs pursuant to the Regulatory Package to all eligible borrowers.
If the exposure of a Lender to a borrower is Rs. 5,00,00,000 (Rupees five crore) or above as on March 1, 2020, the Lender shall develop an MIS on the reliefs provided to its borrowers which shall include borrower-wise and credit-facility wise information regarding the nature and amount of relief granted.
This update has been contributed by Aastha (Partner) and Ashwarya Bhargava (Associate).
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