The current articles deals with RBI’s announcement on 27.03.2020 and 22.05.2020 regarding moratorium on term loans up to 31.08.2020. It points to certain areas of concern and provides pointers for further consideration by RBI and policy-makers.
The outbreak of the COVID-19 pandemic has brought the economic activity in the country to a grinding halt. An already debilitated banking environment now faces the new challenges for maintaining liquidity and servicing borrowers many of whom are facing a near collapse on both demand and supply side. The problem will be more acute for SME, MME and small entrepreneurs who may not possess the staying power to tide over the present phase of uncertainty.
Reserve Bank of India in the immediate aftermath of the outbreak and lockdown came out with a press statement on 27.03.2020 regarding moratorium on term loan and working capital loan. The objective it appears is to provide some immediate relief to the borrowers facing liquidity crunch. The relevant portion of the statement was:
“STATEMENT ON DEVELOPMENT AND REGULATORY POLICIES
II. Regulation and Supervision
* * *
5. Moratorium on Term Loans
All commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India financial institutions, and NBFCs (including housing finance companies and micro-finance institutions) (“lending institutions”) are being permitted to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, 2020. Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, may be shifted across the board by three months.
6. 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.
In respect of Paras 5 and 6 above, the moratorium/deferment is being provided specifically to enable the borrowers to tide over the economic fallout from COVID-19. Hence, the same will not be treated as change in terms and conditions of loan agreements due to financial difficulty of the borrowers and, consequently, will not result in asset classification downgrade. The lending institutions may accordingly put in place a Board approved policy in this regard.
7. Easing of Working Capital Financing
In respect of working capital facilities sanctioned in the form of cash credit/overdraft, lending institutions may recalculate drawing power by reducing margins and/or by reassessing the working capital cycle for the borrowers. Such changes in credit terms permitted to the borrowers to specifically tide over the economic fallout from COVID-19 will not be treated as concessions granted due to financial difficulties of the borrower, and consequently, will not result in asset classification downgrade.
In respect of Paras 5, 6 and 7, the rescheduling of payments will not qualify as a default for the purposes of supervisory reporting and reporting to credit information companies (CICs) by the lending institutions. CICs shall ensure that the actions taken by lending institutions pursuant to the above announcements do not adversely impact the credit history of the beneficiaries.”
This “moratorium” now stands extended for a further 3 month period announced by RBI on 22.05.2020, RBI Statement on “Development and Regulatory Policy”. The new statement provides extension of export credit from 1 year to 15 months, permits banks to allow deferment on working capital payment up to 31.08.2020, conversion of the accumulated interest on working capital loans up to the extension period up to 31.08.2020 into a interest term loan repayable by the end of the financial year and extends the previous moratorium on payment of EMIs on term loans up to 31.08.2020.
The previous press statement was necessary to provide immediate succor, in the background of the sudden pandemic and announcement of a pan India lockdown. The subsequent announcement on 22.05.2020 merely extends the same.
RBI now may additionally consider a more medium to long term objective of facilitating the sector/business wise revival of the economy. The salient points of concern are as follows:
1. While the moratorium announced on 27.03.2020 was ostensibly for a three month period, most borrowers would have paid their EMI for the month of March, 2020 before the statement.
There is no reduction in repayment liability as interest and principal will have to be serviced but after the three month moratorium period up to 31.08.2020.
2. Interest will continue to be charged for the moratorium period and hence, one’s outstanding EMI payment will be higher after the moratorium period than had one paid on a monthly basis. This is likely to be a cause of immediate stress for many borrowers.
3. While RBI expects borrowers to tide over the liquidity problem, it is unlikely that the same can be overcome by most borrowers as there is still uncertainty surrounding how the lockdown will actually be rolled back. Consumer demand is expected to remain very low and cautious even post lockdown and hence the expectation of prompt revival of demand close to previous levels is unlikely.
4. In most sectors the supply chain or/and labour force have been disrupted. Any revival in production and ergo liquidity will therefore necessary have to await restoration of the same post lockdown. Only such revival will help enterprises in servicing their credit facilities.
5. The Government of India has issued an advisory asking all public and private enterprises to ensure that their workers are not retrenched on the pretext of the pandemic and are paid full wages for the period of the lockdown. The Supreme Court in Alakh Alok Srivastava v. Union of India[1], in the context of the Disaster Management Act, stated in its order dated 31.03.2020:
“Disobedience to an order promulgated by a public servant would result in punishment under Section 188 of the Penal Code. An advisory which is in the nature of an order made by the public authority attracts Section 188 of the Penal Code.”
The Government advisory will be very difficult to enforce, however if the same is strictly enforced it will be another factor of stress that will affect liquidity.
6. It may be prudent that the banks assess the situation borrower wise/sector wise. This aspect would require RBI’s earnest consideration.
7. A separate framework may also be formulated for bona fide borrowers with transient default/minor defaults or undergoing a reschedulement of their credit facilities who were servicing their credit facilities but have been hampered by the lockdown and pandemic.
Thus while summarising the above it is clear that while RBI press statement was aimed to be a limited immediate step further flexibility ought to be allowed to the banks that would help them make a clear and detailed assessment of both demand, production and supply side factors borrower/segment wise to assist in revival of the bona fide borrowers.
Many enterprises in the present face peculiar problems. The credit facilities were availed envisaging a certain level of demand and supply. Currently there is a lack of availability of raw materials, labour, transport incapacitating production and distribution. The current near collapse of demand in many sectors has lead to the absence of potential to service the credit facilities. It may also lead to perishing of final goods and atrophy of stocks and assets.
A grim but very likely consequence is that many enterprises may not be able to bear the burden of near collapse of projected demand even post 31.08.2020. They will not be able to service their outstanding EMIs and in a few months thereafter will fall into the NPA category. This will further bar trade for many in terms of their contractual stipulations that require them to be solvent. It many cases it will create stress on their stock value and adversely affect investor confidence. It will affect the credit ratings of the borrowers. In such a scenario the inevitable legal proceedings under the Insolvency Code, SARFAESI and for debt recovery, will lead to collapse of numerous industries that may have a chance at revival, if they given the necessary helping hand. It will overburden an already overloaded judicial system. The same will have ramifying effects on ancillary units and ultimately the health of the economy.
Further increase in NPAs, costly legal proceedings will also impact the profit and loss statement of the banks and their market perception.
With an objective to revive the borrower out of the current imbroglio I suggest that RBI may consider to formulate a more detailed medium to long term plan focusing on revival of the borrower after taking inputs from industry and banks. The following points may be kept in mind while framing its response for borrowers who were servicing their credit facilities but for the pandemic or those who even while servicing their EMIs are in need of easing repayment schedules:
- While the complete lockdown may be ended, lockdown may continue in certain areas or industrial sectors and therefore a flexible approach needs to adopted by RBI and banks;
- Allow banks greater flexibility to assess the default borrower /sector wise taking into account factors both on the supply side and demand side and the bona fides of the borrower;
- Allow banks upon assessment to shape and support and if necessary reschedule loans synchronised with the pace of revival of economic activity;
- The benefit of the recent reduction in REPO rate and CRR granted by RBI to banks should be passed on to the ultimate consumer/borrower;
- RBI may consider to review and consider relaxation of norms for provisioning and classification of accounts as NPA, allowing banks greater window to work with the borrower for standardisation of the account without any stress on the assets available with the banks;
- RBI may also formulate a plan for borrowers with minor or transient defaults, or whose credit facilities were reschedule immediately prior to the lockdown to avail the necessary support from the lending bank;
- Assist banks to work together on the above mentioned lines in cases of consortium loans.
* Author is a graduate from National Law School of India University and has been practicing before the Supreme Court for past 17 years. He works in area of Banking and taxation laws.