The Reserve Bank of India (RBI) on 17 April 2020 introduced additional regulatory measures to alleviate the impact of COVID-19 pandemic on the Indian economy with a focus primarily on the lending institutions. The additional measures are consistent with the global coordinated action committed to by the Basel Committee on Banking Supervision. RBI's earlier COVID-19 – Regulatory Package dated 27 March 2020 (Regulatory Package) was focused on steps to mitigate the burden of debt servicing on the borrowers and to ensure business continuity for viable enterprises. Please read our analysis of the COVID-19 – Regulatory Package circular [here].
In this update, we will analyze RBI's circulars (Circulars) on:
- COVID19 Regulatory Package – Asset Classification and Provisioning (Ref: RBI/2019-20/220 DOR.No.BP.BC.63/21.04.048/2019-20) (Asset Provisioning Circular); and
- COVID19 Regulatory Package – Review of Resolution Timelines under the Prudential Framework on Resolution of Stressed Assets (Ref: RBI/2019-20/219 DOR.No.BP.BC.62/21.04.048/2019-20) (Prudential Framework).
The highlights of the Circulars are set out below:
Asset Provisioning Circular
Asset Classification
In terms of the Regulatory Package, the lending institutions, i.e. commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, All-India Financial Institutions (AIFIs) and Non-Banking Finance Companies (NBFCs) (including housing finance companies and micro-finance institutions) were permitted to allow a moratorium of three months on debt servicing in respect of all term loan instalments falling due between 1 March 2020 to 31 May 2020 (Moratorium Period). Similarly, for cash credit/ overdraft facilities, the Regulatory Package permitted deferment of interest during the period between 1 March 2020 to 31 May 2020 (Deferment Period).
The Regulatory Package expressly provided that the moratorium and deferment would not be deemed to be a restructuring that requires asset classification downgrade. However, the Regulatory Package did not expressly address the issue of asset classification/ ageing of those accounts which were already in default prior to the commencement of the Moratorium Period or the Deferment Period i.e. 1 March 2020. According to the asset classification guidelines under the Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances (Prudential Norms), ageing of a payment for 90 days from the due date would lead to an automatic downgrade of such assets to non-performing asset (NPA) category.
Some borrowers approached courts for relief in the last few weeks and orders were passed by various courts in India granting interim relief. For instance, the Delhi High Court in the matter of Anant Raj Limited v Yes Bank Limited held that the moratorium will be applicable on all ageing/ calculations of account even those which were already in default prior to Moratorium Period, contrary to the language of the Regulatory Package. The Bombay High Court, however, took a slightly different approach, in Transcon Skycity Pvt Ltd & Ors v ICICI Bank Limited & Ors and Transcon Iconica Pvt Ltd & Ors v ICICI Bank Limited & Ors, where it did not interpret the application of the moratorium provided in the Regulatory Package to defaults prior to 1 March 2020 but, on a case-specific basis, excluded the lockdown period for NPA calculation/ ageing of payments. Subsequently, the Delhi High Court in the matter of Shakuntla Educational & Welfare Society v Punjab & Sind Bank, acknowledged the hinderances being caused due to the lockdown and restrained the lender from declaring the petitioners account as NPA for amounts due and payable before 1 March 2020.
Now, in light of the various judicial orders and based on the clarification provided by Basel Committee on Banking Supervision, , RBI has permitted the lending institutions to exclude the Moratorium Period and the Deferment Period for calculating the number of days past due/ ageing for assets classification under Asset Classification under the Prudential Norms. Note that this relief is for those accounts that are classified as standard as on 29 February 2020 (including accounts classified as SMA-1 and SMA-2). RBI, however, made a specific reference to NBFCs and they may continue to comply with Indian Accounting Standards, their board policies and advisories issued by Institute of Chartered Accountants of India for recognition of impairments.
Concessional Provisioning
While RBI has reduced the provisioning pressure by placing a moratorium on asset classification, from a risk-containment perspective, it has advised banks to make concessional provisioning of not less than 10%in two phases over two quarters (up to 5% each for quarters ending 31 March 2020 and 30 June 2020) for those accounts that are in default but were standard as on 29 February 2020. As a relief, the concessional provisioning may be adjusted against actual provisioning requirements at the end of the financial year. For NPA accounts as on 29 February 2020, the lending institutions are required to comply with the extant provisioning requirements set out by RBI.
Freeze on Asset Downgrade Reporting
RBI has clarified that the Moratorium Period and the Deferment Period shall be excluded in the supervisory reporting as well as while reporting to credit information companies. The number of days past due and the SMA status of the account as on 1 March 2020 shall remain unchanged till 31 May 2020.
Additionally, while preparing their financial statements for the half-year ending 30 September 2020, as well as the financial years 2019-20 and 2020-21, the lending institutions are suitably required to disclose in their 'Notes to Accounts', among other things, the amounts in SMA/overdue categories, where the moratorium/deferment was extended and amounts where asset classification benefits are extended. This would give a clear picture to the stakeholders regarding the actual asset quality of the lending institutions.
Prudential Framework
In terms of RBI's - Prudential Framework for Resolution of Stressed Assets Directions 2019 dated 7 June 2019 (7 June Circular), the lenders are required to implement a resolution plan in respect of entities in default within 180 days (Implementation Period) from the end of review period of 30 days (Review Period) from the date of occurrence of default. The Prudential Framework provides for relaxations in outer timelines for Implementation Period as well as the Review Period as contemplated under the 7 June Circular and requirement of additional provisioning. These relaxations, however, do not extend to accounts that have exceeded the 210 days review and resolution period, in accordance with the 7 June Circular, prior to 1 March 2020.
Relaxation: Accounts in the Review Period
For accounts which are within the Review Period as on 1 March 2020, the period between 1 March 2020 to 31 May 2020 (Exclusion Period) shall be excluded for the calculation of the review period of 30 days. For such accounts, the balance Review Period shall commence from 1 June 2020, post which the lenders shall have 180 days for resolution of the stressed account.
Relaxation: Accounts within the Resolution Period
For those accounts which were in Implementation Period as on 1 March 2020, RBI has provided an extension of 90 days from the date when the Implementation Period of 180 days was to expire. This effectively means that the Exclusion Period is excluded from the resolution period of 180 days. The requirement of making additional provisioning of 20 per cent and 15 per cent as per 7 June Circular after the end of 180 days from the end of the review period and 365 days from the commencement of Review Period (in case of non-implementation of the plan within such timelines), respectively, shall trigger after the extended resolution period as per the Prudential Framework expires.
Additionally, the lending institutions shall make relevant disclosures in the 'Notes to Account' for financial statements for the half-year ending 30 September 2020, as well as the financial years 2019-20 and 2020-21 in respect of accounts where the resolution period was extended.
Comment
The announcements made by RBI supplements its earlier announcement made on 27 March 2020 to provide relief to borrowers in distress because of the pandemic situation and help ease the burden on lending institutions which is caused on account of provisioning norms that get triggered in case of default. While some of the High Courts had recently tried to interpret the Regulatory Package to provide relief to borrowers caught in difficulty on account of the prevailing crisis situation, the regulatory announcement would have the effect of balancing the interest of lending institutions while providing relief to the borrowers. The RBI announcement provides required clarity which will help lending institutions to pass on the benefit of regulatory relaxation to borrowers.
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