COVID-19 Update – RBI Governor’s Statement in Response to COVID-19 Crisis

The Reserve Bank of India (‘RBI’) had announced the COVID-19 – Regulatory Package on March 27, 2020 (‘Regulatory Package’), wherein lending institutions were permitted to grant a moratorium of three months on payment of all instalments falling due between March 1, 2020 and May 31, 2020, as set out in our client alert dated March 31, 2020 (accessible here). Further, RBI, on April 17, 2020, released the Governor’s Statement in response to the COVID-19 crisis, wherein it introduced certain additional measures based on its continuing assessment of the macroeconomic situation and financial market conditions, as set out in our client alert dated April 22, 2020 (accessible here).

RBI, on May 22, 2020, released the Governor’s Statement in response to the COVID-19 crisis (‘Governor’s Statement’), wherein it has introduced further additional measures against the backdrop of a deteriorating outlook for economic activity. The measures introduced in the Governor’s Statement pertain to the following categories: (i) measures to improve the functioning of markets and market participants; (ii) measures to support exports and imports; (iii) efforts to further ease financial stress caused by COVID-19 disruptions by providing relief on debt servicing and improving access to working capital; and (iv) steps to ease financial constraints faced by State Governments.

The Governor’s Statement introduces the following measures:

i.   Reduction of Fixed Reverse Repo Rate: It has been decided to reduce the fixed rate reverse repo rate under the liquidity adjustment facility by 40 basis points from 3.75 per cent to 3.35 per cent and policy repo rate by 40 basis points from 4.40 per cent to 4 per cent. Consequently, the Marginal Standing Facility (MSF) rate and the Bank rate stand reduced to 4.25 per cent from 4.65 per cent.

ii. Refinancing Facility for Small Industries Development Bank of India (SIDBI): RBI had earlier announced a special refinance facility of Rs.15,000 crore (approx. USD 2000 million) to SIDBI at RBI’s policy repo rate for a period of ninety days for on-lending/refinancing. In order to provide greater flexibility to SIDBI, it has been decided to roll over the facility at the end of the ninety days for another period of ninety days.

iii. Investments by Foreign Portfolio Investors (‘FPIs) under the Voluntary Retention Route (VRR): FPIs are required to invest in debt securities within three months from the date FPIs are allotted investment limits under the VRR route. It has been decided that an additional period of three months will be allowed to FPIs to fulfil this requirement.

iv.  Liquidity Facility for Exim Bank of India (EXIM Bank): It has been decided to extend a line of credit of Rs.15,000 crore (approx. USD 2000 million) crore to the EXIM Bank for a period of ninety days (with a rollover up to one year) so as to enable it to avail a US dollar swap facility.

v.  Exports and Imports: It has been decided to increase the maximum permissible period of pre-shipment and post-shipment export credit sanctioned by banks from the existing one year to fifteen months, for disbursements made up to July 31, 2020. In order to provide greater flexibility to importers in managing their operating cycles in a COVID-19 environment, it has been decided to extend the time period for completion of outward remittances against normal imports (e., excluding import of gold/diamonds and precious stones/jewellery) into India from six months to twelve months from the date of shipment for such imports made on or before July 31, 2020.

vi. Regulatory Package: RBI had announced certain regulatory measures pertaining to: (a) granting of a three months’ moratorium on term loan installments; (b) deferment of interest for three months on working capital facilities; (c) easing of working capital financing requirements by reducing margins or reassessment of working capital cycle; (d) exemption from being classified as ‘defaulter’ in supervisory reporting and reporting to credit information companies; (e) extension of resolution timelines for stressed assets; and (f) asset classification standstill by excluding the moratorium period of 3 months, etc. by lending institutions. It has been decided to extend the above measures for another period of three months from June 1, 2020 till August 31, 2020, therefore taking the total moratorium period to six months (e., from March 1, 2020 to August 31, 2020) (‘Moratorium Period’). However, the measures pertaining to reassessment of working capital cycle are being extended up to March 31, 2021. Further, lending institutions are permitted to convert the accumulated interest on working capital facilities over the total Moratorium Period into a funded interest term loan which is required to be fully repaid during the course of the current financial year, ending March 31, 2021. RBI is expected to release circular(s) prescribing conditions for the application of these measures and these will need to be evaluated further in detail.

vii.  Exposure Limits to Capital Markets: The group exposure limit of banks is being increased from 25 per cent to 30 per cent of eligible capital base, for enabling corporates to meet their funding requirements from banks. The increased limit will be applicable up to June 30, 2021.

viii. Consolidated Sinking Fund (CSF) of State Governments: It has been decided to relax the rules governing withdrawal from the CSF, while simultaneously ensuring that depletion of the fund balance is done prudently. This change in withdrawal norms will come into force immediately and will remain valid till March 31, 2021.

Specific circulars in relation to the above are expected to be released by RBI (as had been done previously) and one would need to evaluate these circulars as well.

Date: May 23, 2020