Banking in the time of COVID-19

[1] The Covid-19 pandemic which cast its grim shadow over the world around the turn of last year has impacted almost every sphere of human life, perhaps the most alarming of which is the manner in which it has laid waste to the global economy throughout the first and much of the second quarters of 2020. The various world leaders and their governments have had to switch gears from trying to propel growth a few months ago to now trying to rescue their economies and catalyze a recovery. Unconfirmed reports suggest that the first case of COVID-19 in India was reported on January 30, 2020. India currently has the largest number of cases in Asia, with the number of confirmed cases reaching over 200,000 as of June 3, 2020[2].

The Indian government along with the Indian central bank, the Reserve bank of India (“RBI”), has announced several reliefs, in part under the banner of ‘Atma-Nirbhar Bharat’ (“Self Reliant India“), to first stabilize and then revive the Indian economy and the Indian banking sector. Key reliefs include (A) payment moratorium by Indian banks and financial institutions for term loans and working capital facilities, (B) extension of mandatory timelines for resolution of stressed assets and reliefs under asset classification norms, (C) moratorium against insolvency applications (for payment defaults), (D) liquidity support for non-banking financial institutions and housing finance companies, and (E) liquidity support for micro, small & medium enterprises. For the purpose of this Article, we will be analysing the above regulatory measures under (A) to (C).

In order to address the stress in financial conditions caused by COVID-19, as part of their Statement on Development and Regulatory Policies declared on March 27, 2020, the RBI announced that Indian banks and financial institutions were being permitted to allow a moratorium of three months on payment of installments in respect of all term loans outstanding as on March 1, 2020[3][4]. Similarly, in respect of working capital facilities sanctioned in the form of cash credit/overdraft, lending institutions have been permitted to allow a deferment of three months on payment of interest in respect of all such facilities outstanding as on March 1, 2020.

In view of the extension of lockdown and continuing disruption on account of COVID-19, Indian banks and financial institutions have been permitted to further extend the above moratorium by an additional period of three months (from June 1, 2020 to August 31, 2020) in terms of the COVID Regulatory Package declared by the RBI on May 23, 2020.

It has been clarified that during the moratorium period, interest and principal payments may be suspended by Indian banks. However, unpaid interest is to continue to accrue during this period and will be capitalized.

The Ministry of Finance has also clarified that borrowers (corporate and individuals) have the ability to request for availing the moratorium[5].

The parameter for grant of such moratorium was not prescribed purposely, it was intended that banks and financial institutions should allow such moratorium liberally. Reports in May, 2020, suggested that 32 million borrower accounts have availed the loan moratorium scheme[6].

With a view to containing any ripple effect of the moratorium, the Ministry of Finance, RBI along with the securities market regulator (“SEBI“), have also provided ancillary reliefs including – (a) no penal charges for non-payment (for those borrowers which have availed the moratorium), (b) relief that rescheduling of payments on account of the moratorium will not qualify as a default for the purposes of supervisory reporting and reporting to credit information companies by the lenders, thus ensuring that the borrower’s credit history is not adversely impacted, (c) reliefs from asset classification downgrade due to non-payment and higher provisioning by banks (due to a delay), etc.

By way of reliefs under the extent asset classification norms, the RBI has allowed the following relaxations –

(a)    For those borrower accounts classified as ‘standard’ as on February 29, 2020, even if overdue, the moratorium period, wherever granted in respect of term loans, shall be excluded by the lending institutions from the number of days past-due for the purpose of asset classification under the IRAC norms;

(b)   For those working capital facilities sanctioned in the form of cash credit/overdraft (“CC/OD”), where the accumulated interest has been converted into funded interest term loan facilities, such change in terms will not be treated as concessions granted due to financial difficulty of the borrower and will not result in asset classification downgrade;

(c)    For the above accounts which are in default but standard and covered under (a) and/or (b) above, the RBI has prescribed additional provisioning of not less than 10% – but to be spread over two quarters.

Additionally, the mandatory timelines for resolution of stressed assets prescribed by the RBI have been extended – the COVID affected period between March 1, 2020 to August 31, 2020. And the RBI has granted reliefs from additional provisioning due to such delays[7].

With the above measures, the regulator has sought to alleviate the lingering impact of Covid-19 pandemic on the businesses and financial institutions in India, consistent with the globally coordinated actions, while also safeguarding the stability of banks (and public depositors interests by extension).

There were certain grey-areas in interpretation of the aforesaid reliefs. While some High Courts in India have interpreted these reliefs in spirit, largely applying a principle of ‘minimal prejudice to all’ (often surpassing the letter of the regulations), some courts have applied a technical interpretation, leading to a dichotomy.

As we mentioned above, the RBI guidelines have permitted Indian banks and financial institutions to allow a moratorium on term loan and working capital payments by certain borrowers. This relief is intended to be discretionary. Indian banks and financial institutions are expected to put in place board approved policies for grant of such reliefs, basis which a borrower may or may not qualify for such reliefs (for instance a borrower with the ability to repay and who is not facing any financial stress in the COVID-19 pandemic should not avail this moratorium). However, in a public interest litigation before the Supreme Court of India, the Court directed the RBI to ensure implementation of the above reliefs in letter and spirit by Indian banks and financial institutions[8]. This has lead to questions in the market as to whether the judiciary considers that this moratorium should be available for all and whether such an observation is in excess of the interpretative powers of the judiciary.

In the case of Indiabulls Housing Finance Limited vs. HDFC Bank Limited, Indiabulls Housing Finance Limited (‘IHFL’) had availed a term loan of Rs. 540 crores from HDFC Bank. It appears that IHFL sought to avail the moratorium, but this request was rejected on the grounds that its cash flows were unaffected and so it did not qualify for the moratorium. IHFL’s counsel argued that RBI’s circular granting a moratorium to all borrowers was mandatory – which relief was being denied to the petition, which was refuted by the counsel for HDFC. The submissions by the counsel for HDFC were backed by the counsel for the RBI, who reiterated that the reliefs re moratorium are discretionary. While appreciating the submissions by the respondent counsel (for HDFC and RBI), the Delhi High Court only granted interim relief, allowing HDFC to appropriate certain cash deposited with it for a particular EMI tranche, without rejecting the submissions by the borrower in the interests of justice.

A similar approach of granting such relief which causes  “minimal prejudice to all” was adopted by the Bombay High Court in the case of Transcon Skycity Private Limited v ICICI Bank. In this case, the plaintiff defaulted on its repayment obligations in January 2020. It argued that the asset classification reliefs by the RBI stipulated that the period from march 1, 2020 should not be included in the 90-day period leading to an accounts classification as ‘non-performing’, and the clock stopped for this countdown from March 1, 2020. While refusing to provide a sweeping judgement, in the facts of this case only, the Bombay High Court allowed this argument with the above objective of “minimal prejudice to all” .

The above decision came days after the decision of the same court in Idea Toll & Infrastructure vs ICICI Home Finance, where the Bombay High Court interpreted the circulars of the RBI strictly, but nevertheless the reliefs granted were aimed at protecting the interests of the bank whilst minimizing the prejudice to the borrower (emphasizing that the order was passed in consideration of the various RBI circulars and also the fact that the income of the borrower was seriously depleted).

The issue of continuing interest accrual during the moratorium period is also being challenged by before the Supreme Court in Gajendra Sharma Vs Union Of India & Anr.[9] The petitioner has urged the court to declare ultra vires that part of the RBI’s notification that allows the charging of interest since it, “creates hardship in the present scenario of complete national lockdown”. The matter is set to be heard two weeks hence and is yet to be conclusively adjudicated upon.

Recently on June 5, 2020, the Union Cabinet and the President of India have also approved the (Indian) Insolvency & Bankruptcy (Amendment) ordinance, 2020, further to the relief package declared in May, 2020. Under this Ordinance, a 6-month moratorium has been declared from March 25, 2020 (which is further extendable by 6 months, depending on the COVID situation) (Suspension period), for any insolvency applications against any borrower for any default after March 25, 2020. The Ordinance has peculiarly also provided that no insolvency application can ever be preferred for such defaults during this Suspension Period. There are several practical and interpretational concerns with this last proviso (which are the subject matter of significant introspection and discussions in the market).

Lastly, the moratorium is only for the installments which were due from 1st March 2020 up to the period of moratorium conferred by the lender (so, 31st August, in case of a 6 month moratorium). The same does not affect payment obligations that have already fallen due before 1st March. Hence, if there was a default, and there were remedies available to the lender as on 1st March already, the same will not be affected. However, for using the powers under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002  (which is one of the most effective security enforcement and recovery mechanisms prevalent in India), the loan facility would be required to be characterized as non-performing. The intervening asset classification holiday would have the effect of deferring the NPA categorization thus posing a spoke in the already diminished remedies available to lenders.

It is clear that India’s march toward becoming a trillion dollar economy has been rudely interrupted. Whether the relief efforts will bear fruit and drive economic growth back to pre-pandemic levels is a question that will only be answered in time. What is certain is that the Indian regulators will continue to ‘try and try till they succeed’.

This article was published in Financial Regulation International Volume 23 Issue 5, June 2020. © Informa UK Ltd. For more information visit www.financialregulationintl.com

Authors:

Suharsh Sinha, Partner
Saloni Thakkar, Senior Associate
Arzan Zarolia, Associate

Footnotes:

[1] By Suharsh Sinha, Saloni Thakkar and Arzan Zarolia from AZB & Partners
[2]https://economictimes.indiatimes.com/news/politics-and-nation/india-records-over-9800-covid-cases-in-a-day-tally-reaches-226770/videoshow/76209174.cms.
[3] The RBI has clarified that repayment schedule and all subsequent due dates, as also the tenor for such loans, may be shifted across the board by three months.
[4] Deferred installments under the moratorium include the following payments falling due from March 1, 2020 to May 31, 2020: (i) principal and/or interest components; (ii) bullet repayments; (iii) Equated Monthly installments; (iv) credit card dues. It is likely these will continue for the extended period of the EMI moratorium.
[5] Frequently Asked Question by the Ministry of Finance (dated April 1, 2020).
[6]https://www.freepressjournal.in/india/finance-minister-nirmala-sitharaman-says-over-32-crore-people-availed-rbis-3-month-moratorium
[7] As per the RBI’s June 7, 2019 circular, any default in payments has to be recognized within thirty days and such accounts are to be classified as special mention accounts and resolved expeditiously. Once a borrower is reported to be in default by any of the addressee lenders mentioned in the circular, they shall undertake a prima facie review of the borrower account within thirty days from such default (known as the Review Period). During this Review Period of thirty days, lenders may decide on the resolution strategy, including the nature of the Resolution Plan, the approach for implementation of the resolution plan, etc. The lenders may also choose to initiate legal proceedings for insolvency or recovery.
[8] Kamal Kumar Kalia Vs. Union of India & Anr.  (Writ Petition (C) 10955/2020)
[9] Writ Petition (C) 11127/2020

Published In:Financial Regulation International
Date: August 20, 2020