The RBI’s COVID-19 Regulatory Package – A Bone of Contention Between Credit Institutions and Borrowers – Coronavirus (COVID-19)
With the slowdown caused by the COVID-19 pandemic, businesses have, among other things, faced challenges in managing sufficient cash flow to service their debts. The Reserve Bank of India (“RBI“) announced a series of measures to alleviate borrower concerns through itsCircular n ° RBI / 2019-20 / 186 of March 27, 2020 (“Circular“) entitled” COVID-19 Regulatory Package “, establishing a moratorium on reimbursements for a period of 3 months.
Content of the circular:
The circular provides the following instructions:
i (i) Moratorium on loans: Commercial banks, cooperative banks, all Indian financial institutions like EXIM Bank, NABARD, etc., and NBFCs (collectively referred to as “Credit institutions“) are authorized to offer a 3 month moratorium on the payment of all term loan installments due between March and May 2020 (“Adjournment periodHowever, the Circular indicates that interest on these term loans would continue to accrue during this deferral period.
I (ii) Working capital: With regard to working capital facilities, credit institutions are authorized to defer the interest payable, to revise downward the margins required for these facilities or to adjust the payment cycle thereof, during the period of payment. postponement.
i (iii) Accounting treatment : Regarding the degradation of the asset classification, the RBI has provided for the consideration of imminent stress through RBI Circular n ° RBI / 2018-19 / 203 of June 7, 2019. This “prudential framework” classifies loans
i accounts with late payments of up to 90 days as “special mention accounts” or a “SMA‘. Any loan or advance account that is past due beyond 90 days is classified as a “non-performing asset” or a “non-performing asset”.Postcode‘. This classification of assets also obliges credit institutions to make provisions for any possible loss that may arise from these APMs. However, as part of the circular on the regulatory package, the RBI says the moratorium will be
not be considered as an event requiring asset reclassification. Any downgrading of loans and advances to ADMs or NPAs will not be made until after the completion of the Deferral Period.
The Circular further provides that any non-payment during the Deferral Period will not be subject to a report to the credit bureaus and, therefore, that borrowers’ credit history will not be affected during this period. period.
Responses to the circular:
Although the circular recognizes the effect of the pandemic on borrowers’ lending service capacities, the interpretation of certain aspects of the circular has been resolved in the courts. These aspects include the following:
i (i) Accumulation of interest:
One of the first grounds for opposing the circular was the continued accumulation of interest even during the adjournment period. The rationale for such opposition was that the relief provided for in such a moratorium would not make sense to borrowers in the event that additional interest continued to accrue on the total amounts they had to pay. A consequence of this would be a de factopenalty for any borrower who has not made a repayment within this Deferral Period.
APIL was filed by lawyer Amit Sahni at the Supreme Court requesting relief from the easing of interest in addition to the other measures described in the circular. Although this DIP was not reviewed by the SC on the grounds that the Claimant was not a distressed party, the question remains whether the effectiveness of the Circular is compromised by the accumulation of unpaid interest.
I (ii) Discretionary power of credit institutions to apply the moratorium:
The wording of the circular makes it clear that credit institutions will be “allowed to offer” a moratorium for the deferral period to borrowers of its term loan facilities. This suggests that the implementation of the circular is optional and at the discretion of credit institutions and their boards of directors.
However, several borrowers have gone to court to seek redress against payment advices issued by credit institutions between March and May 2020.
This reading of the circular was confirmed by a provisional order of the Delhi High Court while hearing a petition presented by Indiabulls Housing Finance Limited, against a demand for payment of INR 90 crore raised by HDFC Bank. The Delhi HC did not suspend the payment request issued by HDFC and acknowledged that the lender was entitled to deduct INR 90 crore from the fixed deposit receipt provided by Indiabulls as security for the installation. The implication of this ordinance is that not all credit institutions are mandated to implement the circular and can do so at their discretion.
Conversely, a seat of the Supreme Court in the case of Kamal Kumar Kalia v Indian Unionnoted that the circular was not implemented by the banks and requested the RBI to ensure the implementation of the circular in its letter and spirit. This judgment indicates that the circular will apply to all borrowers and, moreover, that credit institutions do not have the discretion to implement the circular or not.
i (iii) Processing overdue accounts prior to the Deferral Period:
While the circular provided that any loan account or advance that became overdue between March 1 and May 31, 2020, would not be subject to any downgrading of asset classification, it did not explicitly specify how the circular would affect loan accounts. which were already overdue before March 1, 2020.
This issue was addressed by the Delhi High Court in the case Anant Raj Limited v Yes Bank Limited,when the petitioner was in default of his repayment obligations before March 1, 2020. Yes The bank declared the petitioner’s account as NPA on March 31, 2020, that is to say90 days from the date the petitioner’s reimbursements were late. However, the Delhi HC considered that the intention of the circular was to maintain status quo during the deferral period, and therefore, Yes Bank must restore the Applicant’s asset classification status to the position it was in on March 1, 2020.
In response to the many cases similar to Anant Raj,seeking clarification on the same issue, the RBI published Circular n ° RBI / 2019-20 / 220 of April 17, 2020 (“New flyerThe new circular stipulates that as long as an account is standard on February 29, 2020 (any account that is not overdue for more than 89 days), the credit institution can exclude the deferral period while
calculate the number of days overdue for these accounts. The new circular provides, however, that even with regard to accounts to which the above advantage is extended, the credit institution must constitute provisions of at least 10% of the amounts unpaid in respect of these accounts.
The RBI has been proactive in addressing the issue of asset classification which has been raised in various court proceedings since the release of the circular. The remaining questions include whether the circular will bind all lending institutions, as indicated by the SC, and whether the RBI will review the continued accumulation of interest even though loan repayments have been deferred.
A crucial aspect on which the RBI remained silent and left to the decision-making powers of the board of directors of a credit institution the contractual triggering of defaults. Defining and predicting the consequences of default is a standard provision in loan documentation. These consequences may include the right of the lender to enforce securities, termination of the contract and restrictions on changing the composition of the board, changing the governing documents, etc., without the prior consent of the lender. The lender may also view a prolonged inability to repay loan payments as a significant adverse effect. Additionally, another standard case of default in loan documentation is cross default. Such a clause allows a lender to claim a default under its own documents, even if a default has occurred with respect to another lender’s facility. The scope of this Circular, even made applicable to a borrower by one of the Credit Institutions from which he has borrowed, will not protect him from the contractual consequences of a default in payment recorded in his loan documentation.
As mentioned above, the RBI responded to the issues raised in the litigation by issuing the new circular, clarifying the treatment of loan accounts with overdue payments prior to March 1, 2020. Likewise, a clarifying circular addressing the others questions raised in litigation will save legal time, while better managing the expectations placed on both credit institutions and their borrowers in this unprecedented environment.
Originally published May 19, 2020
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