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In order to ease the impact of the Covid-19 pandemic on the Indian economy, the Reserve Bank of India (RBI) on 27 March 2020 and 17 April 2020  introduced certain regulatory measures to deal with the challenges arising due to the lockdown (together, the Initial Covid Regulatory Packages). The Initial Covid Regulatory Packages issued by the RBI focused on steps to mitigate the debt servicing burden  of the borrowers on term loans and certain fund based working capital facilities for the period from 1 March to 31 May 2020 (Moratorium) and related relief on income recognition to banks and financial institutions. Please read our analysis of the Initial Covid Regulatory Packages [here].

As the pandemic situation continues in India and with a view to ensure business continuity for viable enterprises, the RBI, as part of the review of the relief measures, has made a series of announcements by way of various circulars issued on 22 May 2020 and 23 May 2020, to extend the period of Moratorium and also expand the scope of the relief package  to cover additional aspects having a bearing on the exchange control situation in the country.

In this update, we analyze the following circulars issued by the RBI on 22 May 2020 and 23 May 2020 (Circulars) and the key announcements made therein:

COVID Regulatory Package – Revised

Moratorium on Term Loans

In terms of the Initial Covid Regulatory Packages, lending institutions, i.e. commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, All-India Financial Institutions (AIFIs) and Non-Banking Finance Companies (NBFCs) (collectively, Specified Lenders) were permitted to grant a moratorium of upto three months on debt servicing in respect of all term loan instalments  falling due between 1 March 2020 to 31 May 2020 (Initial Moratorium Period). Recognising the intensification of the pandemic, continued disruption of economic activities across sectors and the consequent requirement of relaxation of debt burden on businesses, the RBI, through its Revised Covid Regulatory Package, has permitted Specified Lenders to extend the moratorium on payment of instalments for term loans for an additional period of three months from the end of the Initial Moratorium Period. Therefore, the total moratorium permitted to be granted by the Specified Lenders to their borrowers is six months, commencing from 1 March 2020 until 31 August 2020 (Extended Moratorium Period).

Moratorium on Working Capital Facilities

Similar to term loans, the Initial Covid Regulatory Packages permitted  deferment of payment of interest on cash credit/ overdraft facilities during the Initial Moratorium Period, which has also been aligned with the moratorium granted for term loans and the deferment may now continue for the Extended Moratorium Period.

Additionally, while the deferment granted pursuant to the Initial Covid Regulatory Packages granted relief to a number of borrowers across sectors, various beneficiaries of the deferment raised queries with respect to the mechanism for recovery of the deferred interest at the end of the Initial Moratorium Period. Following representations from various borrowers and representations made by banks and financial institutions, the Indian Banks’ Association (IBA) released certain guidelines on 1 April 2020, on the modalities of granting such moratorium including clarifications on payment of accrued interest at the end of the period. The RBI has, under the Revised Covid Regulatory Package, apart from extending the deferment period, clarified that, the relevant Specified Lenders may, at their discretion, permit conversion of the accumulated interest for the deferment period up to August 31, 2020, into a funded interest term loan (FITL) which shall be repayable by 31 March 2021.

Asset Classification

Under the Initial Covid Regulatory Packages, the RBI had permitted Specified Lenders to exclude the Initial Moratorium Period for calculating the number of days past due/ ageing for assets classification under the Prudential Norms. In light of the aforesaid relaxations granted under the Revised Covid Regulatory Package, the RBI has specified that the conversion of accumulated interest into FITL for cash credit/overdraft facilities and the changes in the credit terms permitted to the borrowers in light of the ongoing difficulties, will not be treated as concession granted due to financial difficulty of the borrower, as per the RBI Circular on Prudential Framework for Resolution of Stressed Assets 2019 dated June 7, 2019 (7 June Circular) read with the RBI’s Master Circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated 1 July 2015, and as amended from time to time (Master Circular on IRAC), and consequently, such moratorium/deferment and conversion of interest into FITL,  will not require an asset downgrade under the 7 June Circular.

In relation to past defaults which occurred prior to the Moratorium, it further clarifies that, accounts which were classified as standard (even if overdue) on or before 29 February 2020 shall not be downgraded further during the Extended Moratorium Period, for the purpose of determination of the asset classification under the Master Circular on IRAC .

Resolution Plans

For resolution of defaults in terms of the 7 June Circular, lenders are required to implement a resolution plan in respect of entities in default within 180 days (Implementation Period) from the end of review period of 30 days (Review Period) from the date of occurrence of default. The RBI, under the Revised Covid Regulatory Packages, has now provided for following relaxations in outer timelines for Implementation Period as well as the Review Period as contemplated under the 7 June Circular and requirement of additional provisioning.

Relaxation: Accounts in the Review Period

For accounts where the Review Period of 30 days has not expired as on 1 March 2020, the entire Extended Moratorium Period, shall be excluded for the calculation of the Review Period. For such accounts, the balance Review Period shall commence from 1 September 2020, post which the lenders shall have 180 days for resolution of the account.

Relaxation: Accounts within the Resolution Period

For those accounts which were in the Implementation Period (as on 1 March 2020), RBI has provided an extension of 180 days from the date on which the Implementation Period of 180 days was to expire. Effectively, the Relaxation Period is excluded from the resolution period of 180 days. The requirement of making additional provisioning of 20 per cent and 15 per cent as per 7 June Circular read with the Master Circular on IRAC after the end of 180 days from the end of the Review Period and 365 days from the commencement of Review Period (in case of non-implementation of the resolution plan within such timelines), respectively, shall trigger, after excluding the Extended Moratorium Period.

These relaxations, however, do not extend to accounts that have exceeded the 210 days Review Period and Implementation Period, in accordance with the 7 June Circular, prior to 1 March 2020. 

VRR Circular

The RBI had, in order to encourage and facilitate long term investments by FPIs in the Indian debt market, introduced a special route called ‘Voluntary Retention Route’ (VRR) through a circular dated 1 March 2019 which was subsequently amended from time to time (the VRR Regime). Under the VRR Regime, FPIs were required to invest at least 75% of their ‘Committed Portfolio Size’ (CPS) within three months from the date of allotment of limits. In view of the disruptions caused by COVID-19 and in order to undertake liquidity measures, the RBI has permitted an additional time period of three months to FPIs to invest 75% of the CPS that have been allotted investment limits, between 24 January 2020 (the date of reopening of allotment of investment limits) and 30 April 2020. For FPIs availing the additional time as per the VRR Circular, the retention period for the investments (committed by them at the time of allotment of investment limit) would be reset to commence from the date that the FPI invests 75% of CPS.

Circular on Import of goods and services

As per the Master Direction on Import of Goods and Services’ dated 1 January 2016 (as amended from time to time) issued by RBI, remittances against normal imports (i.e. excluding import of gold/diamonds and precious stones/ jewellery) are required to be completed within 6 (six) months from the date of shipment, except in cases where amounts are withheld towards guarantee of performance etc. Recognizing the disruptions being faced by the importers on account of Covid-19, the RBI has granted relaxations in relation to import payment obligations and has increased the timeline for such remittances from six months to twelve months from the date of shipment for imports made on or before 31 July  2020.

Export Credit

Similarly, recognizing the difficulties being faced by exporters to comply with their obligations due to the lockdown situation in India, the RBI has permitted the period of realisation and repatriation of the export proceeds to India to be increased from nine months to fifteen months from the date of export in respect of exports made upto 31 July 2020. In line with this relaxation, the RBI has also increased the maximum permissible period of pre-shipment and post-shipment export credit sanctioned by banks from one year to fifteen months, for disbursements made upto 31 July 2020.

Large Exposures Framework

As per the extant regulatory regime, the sum of all the exposure of a bank to a group of connected counterparties is restricted to 25% of the bank’s available eligible capital base at all times. Recognizing the pandemic situation and  the need to allow easier flow of credit to corporates during this period by  local banks and financial institutions, the RBI has permitted, banks to increase their exposure to a group of connected counterparties from 25% to 30% of the eligible capital base of the bank, as a one-time measure and has specified that the increased limit will be applicable up to 30 June 2021.

Comment

The announcements made by RBI to extend and supplement the reliefs provided by the Initial Covid Regulatory Package is a welcome move and will help borrowers/exporters/importers in the short run to tide over the difficult business environment being faced by them on account of the continued lockdown resulting in fall in demand and cash flows. These announcements along with further reduction in the repo rate and reverse repo rates to 4 percent and 3.35 percent respectively, are expected to provide further liquidity in the market and increase the flow of credit to the various sectors in the economy.

With serious decline in private consumption driving the Indian GDP growth to negative territory and the majority of the indicators of economic performance indicating a deep and pervasive economic plunge, the lending market is also looking at the RBI to provide structural relief/relaxations to facilitate one- time restructuring without resulting in an asset downgrade. This may be looked at by the RBI as part of the next stage of relaxation when the moratorium is lifted. However, its need and efficacy for the banking system and the industry to tide over the current problems being faced can’t be under-emphasised.

-       Kumar Saurabh Singh (Partner), Rajeev Vidhani (Partner), Ahana Sinha (Principal Associate) and Aditi Bagri (Principal Associate)

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