Not so bitter medicine for covid blues

The covid-19 pandemic and its subsequent lockdowns have resulted in a steep fall in revenue and income for both individual and corporate borrowers. Reflecting its well-earned reputation as a watchful, if perhaps over-eager regulator, the Reserve Bank of India (RBI) announced measures on 6 August that provide a limited window under its directions of 7 June 2019, for the resolution of loans to individual and corporate borrowers that are stressed due to the covid-19 pandemic.

The 6 August directions allow lenders to resolve loans to individuals that are in the nature of personal loans, that were classified as standard loans as at 1 March, and that are not overdue for a period exceeding 30 days. For this purpose, personal loans are defined as consumer credit, education loans, loans for housing, and loans given for investment in financial assets. Resolutions under the 6 August directions may be invoked up to 31 December. A resolution plan may include rescheduling of payments, converting any interest, whether accrued or to be accrued, to another facility, or providing a moratorium of up to two years. Where a resolution plan contemplates a moratorium, the directions prescribe that such a moratorium will come into effect immediately on the implementation of the resolution plan.

A resolution plan will be considered implemented if all required documentation, including lending and security documentation, is completed in accordance with the resolution plan; if the changes to the terms of existing loans as set out in the resolution plan are reflected in the books of the lenders; and if the borrower is not in default with any lender with respect to the terms of the resolution plan. A resolution plan that is not implemented within the above-mentioned timeline will be considered to be subject to the 7 June 2019 framework of the RBI, which may result in increased provisioning and changes in asset classification. Any resolution process must be implemented within 90 days of invoking the resolution.

The 6 August directions prescribe similar conditions for the resolution of corporate borrowers with certain exceptions. In cases of multiple lenders, lenders with 75% of the outstanding loans by amount and 60% of the lenders by number must agree to resolve the borrower under this framework.

In the case of corporate borrowers, a resolution plan must be implemented within 180 days of invoking the resolution. All lenders of a corporate borrower must execute an intercreditor agreement (ICA). The ICA must contain a dispute resolution mechanism for the resolution of disputes between the lenders.

Notably, the 6 August directions permit lenders not regulated by the RBI to be parties to an ICA. If lenders representing 75% of the outstanding loans by amount and 60% of the lenders by number fail to sign an ICA within 30 days of invoking the resolution, then the process would be considered to have lapsed. Where a resolution process for a borrower lapses, such a process cannot be invoked again for that borrower.

The RBI’s 6 August directions do not apply to borrowers that are classified as micro, small and medium enterprises, whose aggregate exposure to lenders exceeds ₹250 million (US$3.35 million). Further, these directions do not apply to loans made by RBI-regulated lenders to other similar lenders. Resolved loans would retain their standard asset classification.

The limited window announced by the RBI is not only welcome, but is also indicative of its pragmatic inclinations. The 6 August directions recognize that although borrowers may be well run and have a good track record, the impact of the covid-19 pandemic may result in their “debt burden becoming disproportionate relative to their cash flow generation abilities”. While there is always a moral hazard in allowing the restructuring of loans, the current times require a more realistic assessment of the realities on the ground to provide flexibility so that the economy as a whole does not seize up.

Although the 6 August directions provide much-needed relief and assistance for loans regulated by the RBI, a glaring limitation to these directions is the absence of relief for borrowing from non-RBI regulated lenders such as the debt capital markets. As a substantial amount of borrowing is now routed through debt capital markets, it would be preferable if both the RBI and the Securities and Exchange Board of India, and other regulators such as those for the insurance and pensions industries prescribe a common framework for the resolution of stress experienced by borrowers due to covid-19.

Sawant Singh and Aditya Bhargava are partners at Phoenix Legal. Sristi Yadav, an associate, assisted on the article.