The relentless and rapid spread of COVID-19 during the last quarter has severely impacted economies the world over, including that of India. The Reserve Bank of India (RBI), has recognized the challenge faced by borrowers in servicing their debt obligations due to the massive disruption of business activities, and has issued a circular dated 27 March 2020 (COVID-19 package).
All lending institutions, that is commercial banks, including regional rural banks, small finance banks and local area banks, co-operative banks, all-India financial institutions, and non-banking financial companies, including housing finance companies were allowed to grant a moratorium of up to three months for instalments due between 1 March and 31 May 2020 (both dates inclusive). Following government lockdown extensions in the past two months, the RBI through its governor’s statement dated 22 May 2020 allowed the extension of this moratorium for another three months from 1 June to 31 August 2020, thus making the total period of moratorium six months up to 31 August 2020.
The moratorium is optional for lending institutions and in cases, where it is granted, the repayment schedule and maturity date for the loans may be moved forward by up to six months. This payment holiday can be granted for all term loans, including agricultural term loans, retail and crop loans, and working capital facilities. Instalments include payments in the form of principal and/or interest components, bullet repayments, equated monthly instalments and credit card dues.
It should be noted that since the offer of moratorium by the lender and its acceptance by the borrower is due to the impact of COVID-19, it is not to be treated as a concession or a change in the terms and conditions of loan agreements due to any financial difficulty of the borrower. It will not, therefore, result in an asset classification downgrade.
For a short time after the COVID-19 package was rolled out by the RBI, there was uncertainty on the treatment of an account where default had occurred prior to 1 March 2020. The question was whether a loan account under default that had been classified as a standard default prior to 1 March would continue to age during the moratorium or whether the period of moratorium would be excluded for the purpose of asset classification. This ambiguity was addressed by the RBI in its circular dated 17 April 2020 which stated that, for all accounts classified as standard on 29 February 2020, including overdue accounts, the moratorium period (if granted) shall be excluded by the lending institutions from the number of days past due for the purpose of asset classification under the Prudential Norms on Income Recognition, Asset Classification and Provisioning, pertaining to Advances circular of 2015 (IRAC norms). The COVID-19 package also provides that a grant of moratorium under which instalments are deferred will not be regarded as a default for the purpose of supervisory reporting and reporting to credit information companies by the lending institutions. Thus, the credit histories of the beneficiaries of the COVID-19 package will not be adversely affected.
It is important to note that since any moratorium is only a deferment of payment obligations, interest will accrue during such period. In case of term loans, interest shall continue to accrue on the outstanding portion of the term loan, and shall be deferred in accordance with the terms of the moratorium granted by the lender. With respect to working capital facilities, the lenders are permitted to defer interest applicable to the facilities under moratorium and to convert the interest accumulated during the deferment period into a funded interest term loan which is to be fully repaid during the course of the current financial year, ending 31 March 2021.
While the COVID-19 package and its further extension is seen as welcome relief by lending institutions as well as by borrowers, its actual benefit will be seen only in the context of the time within which businesses are able to revive and return to normality. One way to help both the lending institutions and borrowers in respect of term loans would be to allow the capitalization of interest during the moratorium period and to structure such interest as a new term loan, payable at the end of the original term loan. In addition, the current time limit of 90 days’ overdue payment before classifying a loan or an advance as a non-performing asset could be extended to provide additional relief to the borrowers. Allowing the lending institutions to grant such operational flexibility and to reschedule existing loan repayments would help both them and their borrowers to sail safely through these tough times.