The COVID-19 pandemic and its dampening effects on economies has compelled governments and regulators to introduce innovative measures, in particular to restore stakeholder confidence in financial markets. Among Indian regulators, the Reserve Bank of India (RBI) responded to the pandemic with remarkable alacrity when it issued directions on 27 March. These put in place a framework that enabled banks and financial institutions regulated by it to offer some respite to borrowers in the form of a moratorium on their loans. On 17 April, the RBI issued further directions which provided much needed clarity on provisioning by enabling banks and financial institutions to maintain pre-pandemic asset classifications.
These directions also extended the timelines for the resolution of stressed assets under the RBI framework by 90 days. In tandem with the RBI’s moves, the Insurance Regulatory and Development Authority of India (IRDAI) announced measures enabling insurance companies to offer moratoriums on financial assistance provided by them. While the RBI and the IRDAI were quick to provide clear and effective direction to their constituents, the Securities and Exchange Board of India (SEBI), perhaps due to the lack of a coordinated regulatory strategy, ended up issuing a series of directives. According to market feedback, these directives initially appeared to lack coherence and were in need of clarification.
On 30 March, seemingly to align with the RBI’s directions on moratoriums, the SEBI granted certain relaxations to credit rating agencies by allowing them to not recognize delays in the payment of principal or interest as defaults on account of the pandemic. The SEBI further granted certain relaxations on compliance and filings to be made by various entities regulated by it, and also extended the deadline for the implementation of its circular on the stewardship code for mutual funds and alternative investment funds. However, SEBI’s apparent disinclination to issue any specific directions that would allow market participants regulated by it to offer a moratorium similar to that offered to entities regulated by the RBI led to much confusion and despair. As a considerable proportion of borrowings have now shifted to the capital markets regulated by the SEBI, this lack of movement had a similar effect to the jamming of a wheel stalling a car engine.
Various stakeholders such as the Association of Mutual Funds in India provided feedback to SEBI seeking relaxations, particularly in the case of instruments backed by loans that were now under a moratorium granted under the RBI’s directions. Reports indicated that the SEBI took the view that entities such as mutual funds already had flexibility in valuation, thus enabling them to deal with situations such as those caused by the pandemic. However, while certain SEBI regulations permit asset management companies to deviate from established policies and procedures in valuing assets and securities, such decisions require the approval of the boards of trustees, and may not be taken speedily. On 23 April, SEBI finally issued directions enabling valuation agencies to not consider in payment of interest or principal or the extension of maturity of any securities by an issuer as defaults for the purposes of the valuation of the money market or debt securities held by mutual funds, so long as such delays occurred solely due to the lockdown or a moratorium granted pursuant to the RBI’s directions. The effectiveness of the timing of these directions is debatable as a significant portion of the moratorium allowed by the RBI had already elapsed.
When all regulatory moves finally appeared to have been aligned, in a somewhat puzzling move the RBI announced an extension of the moratorium period, and related asset classification and provisioning relaxations, to 31 August. This was later followed by the issue of an ordinance amending the Insolvency and Bankruptcy Code, 2016, to suspend its application for six months, with a possible extension to one year. While there was an undoubted need for the initial moratorium, its extension was perhaps neither necessary nor desirable.
The extended moratorium coupled with the suspension of the insolvency code would have the effect of reducing the confidence of market participants and decreasing their willingness to lend. These moves have significantly risked credit discipline by materially reducing incentive to borrowers to restart repayments. It would have been better to have had a coordinated regulatory strategy from the beginning, which would have enabled all regulators to act in lock-step, followed by measures that provided targeted relief to particular sectors such as small and medium enterprises and salaried professionals that genuinely required help from their lenders.
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