FINANCIAL REGULATORY COVID PACKAGE – RBI
The Reserve Bank of India, in a bid to lend a supporting hand to all businesses and Financial Institutions during this difficult time of COVID-19 wherein the entire nation is in a state of lockdown has vide its Circular dated 27.03.2020 titled as “COVID-19 – Regulatory Package” given a set of detailed instructions, that was put into force immediately, to the Commercial Banks, Co-operative Banks, all India Financial Institutions and other Non Banking Finance Companies. The gist of the same are as follows:
- Rescheduling of Payments – Term Loans and Working Capital Facilities:
A moratorium of three months on payment of all instalments and working capital facilities sanctioned in the form of cash credit/overdraft (“CC/OD”) is granted and the lending institutions are permitted to defer the recovery of interest applied falling due between March 1, 2020 and May 31, 2020. The Circular also clarified that the accumulated Interest shall be collected immediately after the said period and the residual tenure shall shift by three months after the moratorium period. - Easing of Working Capital Financing :
Lending institutions may recalculate the ‘drawing power’ by reducing the margins and/or by reassessing the working capital cycle available to all such changes effected up to May 31, 2020 and shall be contingent on the lending institutions satisfying themselves that the same is necessitated on account of the economic fallout from COVID-19. - Classification as Special Mention Account (SMA) and Non-Performing Asset (NPA) :
No measure given under 1 &2 by itself, shall result in asset classification downgrade. The Circular clarifies that an asset classification of term loans which are granted shall be determined on the basis of revised due dates and the revised repayment schedule. Similarly, in working capital facilities where relief is provided, the SMA and the out of order status shall be evaluated considering the application of accumulated interest immediately after the completion of the deferment period as well as the revised terms as permitted. The above announcements will not adversely impact the credit history of the beneficiaries - Other Conditions –
Board approved polices to be put in place by the Lending Institutions for suitable reliefs to all eligible borrowers. Wherever the exposure of a lending institution to a borrower is ₹ 5 crore or above as on March 1, 2020, the bank shall develop a Management Information System(MIS) on the reliefs provided to its borrowers.
In addition to this the RBI on 17.04.2020 via its Governor’s statement and Circular announced certain additional regulatory measures aimed at alleviating the lingering impact of COVID-19 and the same are as follows:
- Asset Classification under the Prudential norms on Income Recognition, Asset Classification (IRAC)
Even if overdue, the moratorium period of 3 months and CC/OD deferred, wherever granted, shall be excluded by the lending institutions from the number of days past-due for the purpose of asset classification under the IRAC norms in respect of all accounts classified as standard as on February 29, 2020. - Provisioning
In respect to accounts in default, lending institutions shall make general provisions of not less than 10 per cent of the total outstanding of such accounts, to be phased over two quarters as under: (i) Quarter ended March 31, 2020 – not less than 5 percent (ii) Quarter ending June 30, 2020 – not less than 5 per cent. This can be adjusted against the actual provisioning requirements and shall not be reckoned as NPA. - Other Conditions:
The lending institutions shall suitably disclose the above in the ‘Notes to Accounts’ while preparing their financial statements for the half year ending September 30, 2020 as well as the financial years 2019-20 and 2020-2021
In addition, the RBI also stated the following vide its Circular dated 17.04.2020 with regard to Review of Resolution Timelines under the Prudential Framework on Resolution of Stressed Assets:
- Lenders are required to implement a resolution plan in respect of entities in default within 180 days from the end of Review Period of 30 days.
- Accounts within the Review Period as on March 1, 2020, the period from March 1, 2020 to May 31, 2020 shall be excluded from the calculation of the 30-day timeline and shall resume from June 1, 2020, upon expiry of which the lenders shall have the usual 180 days for resolution.
- Accounts where the Review Period was over, but the 180-day resolution period had not expired as on March 1, 2020, the timeline for resolution shall get extended by 90 days from original expiry.
- In respect of all other accounts, the provisions of the Prudential Framework shall be in force without any modifications.
The proactive steps taken by the Reserve Bank of India in ensuring a breather for the borrowers, considering their financial stress and the economic situation caused by the COVID-19 pandemic is a thoughtful and a commendable action to help corporates stay solvent and is a possible trendsetter policy that can be followed by other countries. At this stage we can only hope that the Government of India and the Reserve Bank of India come up with more temporary measures to ensure the stability of the market and the economy of the country as a whole.