Moratorium on loans due to Covid-19 disruption

Team Financial Services, Vinod Kothari Consultants P Ltd. 

finserv@vinodkothari.com 

This version dated 14th April, 2020. We shall continue to develop this further based on the text of notification and the clarifications, if any, issued by the RBI.

We are also gratefully obliged to see that the page has received attention and comments from several borrowers. We submit, humbly, that the page is primarily for guidance of lenders.]

To address the stress in the financial sector caused by COVID-19, several measures have been taken by the RBI as a part of its Seventh Bi-monthly Policy[1]. Further, the RBI has come up with a Notification titled COVID 19 package[2]. These measures are intended to mitigate the burden on debt-servicing caused due to disruptions on account of COVID-19 pandemic. These measures include moratorium on term loans, deferring interest payments on working capital and easing of working capital financing. We have tried to provide our analysis of the measures taken by RBI in form of the following FAQs.

Further, in this regard the Ministry of Finance has also issued FAQs on RBI’s scheme for a 3-month moratorium on loan repayment.

Legal/contractual nature of the Moratorium

1.     Has the RBI granted a compulsory moratorium?

No, the lending institutions have been permitted to allow a moratorium of three months. This is a relaxation offered by RBI to the lending institutions. Neither is it a guidance by the RBI to the lenders, nor is it a leeway granted by the RBI to the borrowers to delay or defer the repayment of the loans. Hence, the moratorium will actually have to be granted by the lending institution to the borrowers. The RBI has simply permitted the lenders to grant such moratorium.

2.     Who are the lending institutions covered by the moratorium requirement?

All commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies and micro-finance institutions) have been permitted to allow the moratorium relaxation to its borrowers.

3A.     Is this the first time such a moratorium or relaxation has been granted by the RBI?

During the demonetisation phase in November 2016, a 60 day relaxation was offered to small borrowers accounts for recognition of an asset as sub-standard. Our detailed analysis on the same can be viewed here- http://vinodkothari.com/wp-content/uploads/2017/03/Interpreting_the_2_months_relaxation_for_asset_classification.pdf

3B.      Has there been similar relaxation provided by other jurisdictions across the globe?

India is not the only country to grant a moratorium during this time of crisis. Several other countries have granted a moratorium in varying terms. A table showing the details of moratoriums granted globally may be read here http://vinodkothari.com/2020/04/the-great-lockdown-standstill-on-asset-classification/ 

4.     What is meant by moratorium on term loan?

Moratorium is a sort of granting of a ’holiday’- it is a repayment holiday where the borrower is granted an option to not pay during the moratorium period. It is a restructuring of the terms of the loan with the mutual consent of the lender and the borrower. The consent of the lender will be in the form the lender’s circular or notice – see below. The consent of the borrower may be obtained by a “deemed consent unless declined” option.

For example, in case the instalment falls due on April 01, 2020, and the lender has granted a moratorium of 3 months from a specific date, say April 1, 2020,  then the revised due date for repayment shall be July 1, 2020.

Scope and implementation of the moratorium

5.     From what date can the moratorium be granted?

The lenders are permitted to grant a moratorium of three months on payment of all instalments falling due between March 1, 2020 and May 31, 2020. The intention is to shift the repayment dates by three months. Therefore, the moratorium should start from the due date, falling immediately after 1st March, 2020, against which the payment has not been made by the borrower.

For example, if an instalment was due on 15th March, 2020, but has remained unpaid so far, the lender can impose the moratorium from 15th March, 2020 and in that case, revised due date shall be 15th June, 2020

6.     Will the moratorium be applicable in case of new loans sanctioned after March 1, 2020 during the lockdown period?

Technically, new loans sanctioned after March 1, 2020 are not covered under the press release since it mentioned about loans outstanding as on March 1, 2020. However, based on the RBI circular it can be inferred that the Lending Institution may at its own discretion extend the benefit to such borrowers in case the loan instalments of such new loans are falling due between March 1, 2020 and May 31, 2020.

7.     Is the moratorium on principal or interest or both?

The repayment schedule and all subsequent due dates, as also the tenor for loans may be shifted by three months (or the period of moratorium granted by the lending institution). Instalments will include payments falling due from March 1, 2020 to May 31, 2020 in the form of-

(i) principal and/or interest components;

(ii) bullet repayments;

(iii) Equated Monthly instalments;

(iv) credit card dues.

8A.     What shall be the moratorium period?

Lending Institutions may use their discretion to allow a moratorium of upto three months. It is not necessary to provide a compulsory moratorium of three months- it can be less than three months as well. Practically, we envisage that all lenders shall grant a moratorium to all borrowers across board for 3 months.

However, a moratorium beyond three months shall be considered as restructuring of loan.

8B.   Can NBFCs grant extensions for loans where the last EMI falls due after May 31st?

The Covid-19 Regulatory Package issued by RBI has allowed the grant of moratorium to only those instalments that are falling due between March 1, 2020 and May 31, 2020. However, considering the disruption caused across the globe, the Company may consider extension of the EMI dates for installments falling due after May 31, 2020.
The reason for granting such relaxation is not related to any specific borrower’s financial difficulty because of any economic or legal reasons. The reason for such relaxation would be the disruption caused across an entire class of borrower and not any individual borrower. Hence, this would not be considered as restructuring and will not require any asset classification downgrade.

9.     Reading the language of the RBI Notification strictly, it says: “lending institutions” are permitted to grant a moratorium of three months on payment of all instalments1 falling due between March 1, 2020 and May 31, 2020. [Para 2]. The notification nowhere refers to the payments which had already fallen due before March 1. Therefore, will those payments continue to age during the moratorium period? For example, will something which is 30 DPD will become 120 DPD?

As per the contents of the letter dated March 31, 2020 written by RBI to IBA, any amount which was overdue on 29th Feb, 2020, there is no moratorium with respect to those amounts, and therefore, the existing IRAC norms will continue to apply. The RBI contends that there was no disruption in February, and therefore, one cannot bring disruption as the basis for not paying what had fallen due before March 1.

However, in our view, such an interpretation will be completely counter-intuitive. The whole intent behind the moratorium is the disruption in the system due to an externality. If the borrower had an instalment which was 30 days past due on 1st March, it cannot be contended that he will have difficulty in paying his current dues but will have no difficulty in paying what had already become due. But for the systemic disruption, it could well have been that the borrower would have cleared all his dues.

The meaning of the moratorium is that payments do not fall due during the period of the moratorium – whether current or past. Therefore, the moratorium period cannot result into ageing of the past dues. Of course, if the past dues are an overdue rate, the overdue rate may continue. But for the purpose of counting DPD, the moratorium period will have to be excluded.

Taking any other interpretation will frustrate the very purpose of the moratorium. By rules of appropriation, whatever the borrower pays between March 1 and May 31 would have first gone towards clearing his overdues. Hence, a moratorium on the current dues should apply to the existing dues as well.

There has been a ruling of the Delhi High court in Anantraj Limited vs Yes Bank order dated 6th April, 2020 in response to a writ petition, where the court has also stated that there will be no transformation of a standard account into an NPA, since before an account becomes an NPA, it has to pass through SMA 1 and SMA 2, and as per RBI’s own admission, there will be no downgradation  of the status due to the moratorium. In essence, the Delhi High court seems to be holding the same view as expressed by us above. Our analysis of the judgement can be read here- http://vinodkothari.com/2020/04/moratorium-on-asset-classification-of-past-due-accounts/

10. How will the moratorium impact the existing loan tenure?

In case a moratorium is granted, the RBI circular states that the repayment schedule for such loans as also the residual tenure, will be shifted across by three months after the moratorium period.

However, in certain cases of long tenure loans (say, home loans), the additional burden on the borrower due to the accrued interest (and interest on such interest) would cause the amount to swell so much that paying the accumulated interest in one go may not be feasible. This may require the lender to convert the accrued interest also into instalments. Converting such accrued interest into manageable instalments is the lender’s prudential call, and should not be taken as a case of restructuring, since the total tenure is going beyond 3 months over the original term.

11. Will the interest accrue during the moratorium period?

Yes, the moratorium is a ‘payment holiday’ however, the interest will definitely accrue. The accrual will not stop.

12. Will there be delayed payment charges for the missing instalments during the moratorium period?

Overdue interest is charged in case of default in payment. However, during the moratorium, the payment itself is contractually stopped. If there is no payment due, there is no question of a default. Therefore, there will be no overdue interest or delayed payment charges to be levied.

13. Which all loans shall be considered eligible for the relaxation?

All term loans outstanding as on March 1, 2020 are eligible to claim the relaxation. Also, there may be a deferment of interest in case of working capital facilities sanctioned in the form of cash credit/overdraft and outstanding as on March 1, 2020.

14. Is the moratorium applicable to the following:

(a)  Personal loans

The moratorium is applicable to all term loans and working capital facilities (refer para 5 and 6 of the Statement on Developmental and Regulatory Policies). Therefore, the lender may extend the benefit of the moratorium or deferment of interest to lending facilities in the nature of term loans as well as revolving lines of credit, a.k.a. working capital facilities, as the case may be.

(b)  Overdraft facilities

Overdraft facilities allow the account-holder to withdraw more money than what is held in the account. It is a kind of short-term loan facility, which the account-holder shall be required to repay within a specified period of time or at once, depending on the terms of arrangement with the bank. Thus, in case repayment is to be made within a specified tenure , the same qualifies to be term-loan and moratorium shall be applicable on EMIs of such overdraft facility.

(c) An unsecured personal loan extended by a lender through prepaid cards for making payments at partner merchant PoS

Such unsecured personal loans may be repayable in the form of EMIs or a bullet repayment. As discussed above, if repayment is made over a period of time, moratorium is applicable. In case of bullet repayments as well, moratorium may be granted.

(d) Invoice financing

Invoice financing can be of 2 types- (a) Factoring and (b) Asset-based invoice financing.

In case of factoring, the factor purchases the receivables of an entity and pays the amount of receivables reduced by a certain percentage (factoring fee) to the entity. Thereafter, the factor is responsible to recover the money from the debtor of such entity. There is no moratorium in case of commercial invoices.

Another device commonly used is invoice financing i.e. asset-based invoice financing, which  allows a vendor to avail a credit facility  against the security of receivables. Since the underlying here is the commercial receivable, for which there is no moratorium, the same is not covered by the moratorium as being discussed.

(e) Payday loans

Payday loans are unsecured personal credit facilities obtained by salaried individuals against their upcoming pay-cheques. The amount of such facilities is usually limited to a certain part of the borrower’s upcoming salary.

In case of such loans, the repayment term, though very short, is pre-determined and is payable from out of the salary of the individual. As there is no deferral of salary payments, we are of the view that there is no case of disruption here.

(f) Loan against turnover

These loans are extended by the lenders on the basis of expected turnover of a merchant, mostly on e-commerce websites. The intent is to finance the day-to-day business needs of the borrower in order to attain the expected turnover. Thus, such loans are essentially working capital loans. As already discussed, moratorium may be allowed on working capital loans.

(g) Long-term loans

These kinds of loans have a pre-specified term, which is usually greater than 3 years. Needless, to say, being term loans, moratorium shall be allowed on such loans. Such loans are usually secured and may cover the following kinds of loans:

  • Housing loans
  • Equipment finance loans
  • Personal loans
  • Two-wheeler loans
  • Auto-finance loans

(h) Gold loans

The applicability of the Notification to gold loans is quite interesting. Most gold loans have a bullet repayment term. In addition, some gold loans induce a customer to make payment of interest on a regular basis, and offer a concessional rate of interest should the customer pay interest on a regular basis. The following situations may explain the applicability of the Notification to gold loans:

  • If the bullet repayment is due during the Moratorium period, the loan will be eligible for the moratorium, and the borrower may make the bullet repayment at the end of the moratorium period.
  • If the bullet repayment is due after the Moratorium period, the moratorium has no impact on the loan. There is no question of any extension of the loan term, as there were no payments due during the disruption period.
  • If there is interest payment during the moratorium period, and the customer has opted for the same, the customer will get holiday from the interest payment during the moratorium period, and the customer will still be eligible for the lower rate of interest.

15. How will the moratorium be effective in case of working capital facilities?

The working capital facilities have been allowed a deferment of three months on payment of interest in respect of all such facilities outstanding as on March 1, 2020. The accumulated interest for the period will be paid after the expiry of the deferment period.

16. Is it possible for the Lender to not provide a moratorium?

Technically, certainly yes. However, borrowers may take advantage of the Ministry of Law circular that the COVID disruption is a case of “force majeure” and FMC does not result in a contractual breach. Hence, lenders will be virtually forced into granting the same.

17. Is the lending institution required to grant the moratorium to all categories of borrowers?

Since the grant of the moratorium is completely discretionary, the lending institution may grant different moratoriums to different classes of borrowers based on the degree of disruption on a particular category of borrowers. However, the grant of the moratorium to different classes of borrowers should be making an intelligible distinction, and should not be discriminatory.

18. Can the lender revise the interest rate while granting extension under the moratorium?

The intent of the moratorium is to ensure relaxation to the borrower due to the disruption caused. However, increase in interest rate is not a relief granted and hence should not be practised as such.

19. Can the moratorium period be different for different loans of the same type? For example, a lender grants a moratorium of 3 months for all loans which are 60-89 DPD, and a moratorium of 2 months for all loans which are 30 -59 DPD as on the effective date.

The moratorium is essentially granted to help the borrowers to tide over a liquidity crisis caused by the corona disruption. In the above example, the scheme seems to be to get over a potential NPA characterisation, which could not be the intent of the relaxation.

20. Will the grant of different moratorium periods be regarded as discrimination by the NBFC?

An NBFC may assess where the disruption is likely to adversely impact the repayment capacity of the borrower and take a call based on such assessment. For example in case of farm sector borrowers and daily wage earners, the disruption will be maximum. However, a salaried employee may not be facing any impact on their repayment capacity.

21. Can a borrower prevail upon a lending institution to grant the moratorium, in case the same has not been granted the lending institution?

The grant of the moratorium is a contractual matter between the lender and the borrower. There is no regulatory intervention in that contract.

22. Can the borrower pay in between the moratorium period?

It is a relief granted to the borrower due to disruption caused by the sudden lockdown. However, the option lies with the borrower to either repay the loan during this moratorium as per the actual due dates or avail the benefit of the moratorium.

23. Will such payment be considered as prepayment?

This will not be considered as prepayment and there will not be any prepayment penalty on the same.

24. Is the moratorium applicable to financial lease transactions?

Financial leases are akin to loan transactions and have rental payouts similar to EMIs in case of a term loan. Hence, lessors under a financial lease may confer the benefit of the moratorium under the RBI circular.

25. Is the moratorium applicable to operating lease transactions?

Operating leases are not considered as financial transactions and hence, they shall not be covered under the RBI circular for granting moratorium. However, lessors may, in their wisdom, grant the benefit of moratorium. Note that the NPA treatment in case of operating leases is not the same as in case of loans.

Refer to our various articles on leasing here.

26. A loan was in default already as on 1st March, 2020. The lender has various security interests – say a mortgage, or a pledge. Will the lender be precluded from exercising security interest during the holiday period?

The moratorium is only for what instalments/payments were due from 1st March 2020 upto the period of moratorium conferred by the lender (so, 31st May, in case of a 3 month moratorium). The same does not affect payment obligations that have already fallen due before 1st March. Hence, if there was a default, and there were remedies available to the lender as on 1st March already, the same will not be affected.

 

However, note that for using the powers under the SARFAESI Act, the facility has to be characterised as non-performing. Unless the facility was already a non-performing loan, the intervening holiday will defer the NPA categorisation. In that case, the use of SARFAESI powers will be deferred until NPA categorisation happens.

Modus operandi for giving effect to the moratorium

27. What are the actionables required to be taken by the lending institution to grant the moratorium?

The RBI Notification dated 27th March, 2020, para 8 mentions about a board-approved policy. Accordingly, the lending institution may put in place a policy. The Policy should provide maximum facility to the concerned authority centre in the hierarchy of decision-making so that everything does not become rigid. For instance, the extent of moratorium to be granted, the types of asset classes where the moratorium is to be granted, etc., may be left to the relevant asset managers.

Further, the instructions in the notification must be properly communicated to the staff to ensure its implementation.

You may refer to the list of actionables here.

28. The RBI has mentioned about a Board-approved policy. Obviously, under the present scenario, calling of any Board-meeting is not possible. Hence, how does one implement the moratorium?

Please refer to our article here as to how to use technology for calling board meetings.

29. In case the lender intends to extend a moratorium, will it require consent of the borrower and confirmation on the revised repayment schedule?

Based on the policy adopted by the lending institution, the moratorium may be extended to all borrowers or only those who approach the lender in this regard. However, the revised terms must be communicated to the borrower and the acceptance must be recorded.

An option may be provided to the borrower for opting the moratorium. In case the borrower fails to respond or remains silent, it may be considered as deemed confirmation on the moratorium. In case of acceptance by the borrower to opt for moratorium, including deemed acceptance, the revised terms shall be shared which should be accepted by the borrower- either electronically or such other means as per the respective lending practice. Further, the PDC or NACH should not be presented for encashment as per the existing terms.

However, in case the borrower has not opted for the moratorium by his action or otherwise has expressly denied the option, the PDC and NACH shall be encashed as per the existing terms and necessary action can be initiated by the lender in case of dishonour.

30. Is the lender required to obtain fresh PDCs and NACH debit mandates from the borrowers?

An option may be provided to the borrower for opting the moratorium. In case the borrower fails to respond or remains silent, it may be considered as deemed confirmation on the moratorium. In such a case the PDC or NACH should not be presented for encashment as per the existing terms.

However, in case the borrower has not opted for the moratorium by his action or otherwise has expressly denied the option, the PDC and NACH shall be encashed as per the existing terms and necessary action can be initiated by the lender in case of dishonour.

31. In case the payment has been made by a borrower for the installment due for the month of March 2020, does the lender need to refund the same?

The payments already received may not be considered for the purpose of passing the moratorium relaxation. The lenders have their discretion, but appropriately, these payments may either be regarded as payment of principal as on 1st March, 2020, duly discounted for the time lag between 1st March and the actual repayment date, or the payment already made by the borrower may just be excluded from the moratorium. For example, if the payments fell due on 7th March, and by 15th March, 80% of the payments have already been made, the same may just be excluded from the holiday, thereby granting holiday only for the  payments due on 15th April and 15th May.

NPA classification and restructuring

32. What will be the impact on the NPA classification on the following loans:

  1. Standard as on March 1, 2020
  2. NPA as on March 1, 2020
  3. Showing signs of distress as on March 1, 2020

In case of standard loan, the moratorium period will not be considered for computing default and hence, it will not result in asset classification downgrade. Our views in this regard have been discussed elaborately above.

As per the FAQs issued by the MoF, it is clear that the benefit of moratorium is available to all such accounts, which are standard assets as on 1st March 2020. Hence, loans already classified as NPA shall continue with further asset classification deterioration during the moratorium period in case of non-payment.

In case of assets showing signs of distress as on March 1, 2020, the moratorium may still be extended since they are classified as standard asset. Further, the asset classification of account which has been classified as SMA should not further be classified as a NPA in case the installment is not paid during the moratorium period and the classification as SMA should be maintained. [Refer our detailed response in Q9 above]

33. Effectively, are we saying the grant of the moratorium is also a stoppage of NPA classification?

The RBI contends that there was no disruption in February, and therefore, one cannot bring disruption as the basis for not paying what had fallen due before March 1. The benefit of the moratorium is not applicable for the amounts which were already past due before March 01, 2020..

34. Is grant of moratorium a type of restructuring of loans?

The moratorium/deferment is being provided specifically to enable the borrowers to tide over the economic fallout from COVID-19. Hence, the same will not be treated as change in terms and conditions of loan agreements due to financial difficulty of the borrowers.

35. What will be the impact on the loan tenure and the EMI due to the moratorium?

Effectively, it would amount to extension of tenure. For example, if a term loan was granted for  a period of 36 months on 1st Jan 2020, and the lender grants a 3 months’ moratorium, the tenure effectively stands extended by 3 months – so it becomes 39 months how.

Since there is an accrual of interest during the period of moratorium, the lender will have to either increase the EMIs (that means, recompute the EMI on the accreted amount of outstanding principal for the remaining number of months), or change the last EMI so as to compensate for the accrual of interest during the period of the moratorium. Since changing of EMIs have practical difficulties (PDCs, standing instructions, etc.), it seems that the latter approach will be mostly used.

36. How will the deferment of interest in the case of working capital facilities impact the asset classification?

Recalculating the drawing power by reducing margins and/or by reassessing the working capital cycle for the borrowers will not result in asset classification downgrade.

The asset classification of term loans which are granted relief shall be determined on the basis of revised due dates and the revised repayment schedule.

37. Will the delayed payment by the borrower due to the moratorium have an impact on its CIBIL score?

The moratorium on term loans, the deferring of interest payments on working capital and the easing of working capital financing will not qualify as a default for the purposes of supervisory reporting and reporting to credit information companies (CICs) by the lending institutions. Hence, there will be no adverse impact on the credit history of the beneficiaries.

Impact of moratorium on corporate borrowers

37A. What will be the impact of the moratorium on the corporate borrowers? If the corporate borrower is having a secured loan with the bank, and due to the moratorium, the tenure gets extended, is it a case of modification requiring “modification of charge” within the meaning of the Companies Act? 

Answer should be in the negative, for the following reasons:

  1. 79 provides for “modification in the terms or conditions or the extent or operation of any charge”. There is no modification in the terms of the charge, or the extent or operation of the charge. The charge is on the same property; the exposure amount also does not change by the very fact of the moratorium.
  2. The modification is not a result of a unique transaction between the lender and the borrower, which needs to be publicly intimated. The moratorium is the result of an external event, which the public at large is expected to be aware of.
  3. The moratorium is not a case of restructuring of the debt that requires any kind of regulatory reporting by the borrower. The moratorium is the result of a force majeure event.

Taking the view that the resulting extension of tenure is a case of moratorium will make thousands of borrowers file modification, which is both perfunctory and unnecessary.

37B. Under Part A of Schedule III of LODR Regulations, a corporate debt restructuring is to be deemed to be a material event requiring reporting to the stock exchanges. Is the moratorium-related restructuring a case of corporate debt restructuring? 

Answer should be negative once again. This restructuring is not a result of a credit event. It is result of a force majeure.

Impact of the Moratorium on accounting under IndAS 109

38. Where there are no repayments during the moratorium period, is it proper to say that the loan will be taken to have “defaulted” or there will be credit deterioration, for the purposes of ECL computation?

The provisions of para 5.5.12 of the IndAS 109 are quite clear on this. If there has been a modification of the contractual terms of a loan, then, in order to see whether there has been a significant increase in credit risk, the entity shall compare the credit risk before the modification, and the credit risk after the modification. Sure enough, the restructuring under the disruption scenario is not indicative of any increase in the probability of default.

39. There are presumptions in para B 5.5.19 and 20 about “past due” leading to rebuttable presumption about credit deterioration. What impact does the moratorium have on the same?

The very meaning of “past due” is something which is not paid when due. The moratorium amends the payment schedule. What is not due cannot be past due.

40. Will the effective interest rate (EIR) for the loan be recomputed on account of the modification of tenure?

The whole idea of the modification is to compute the interest for the deferment of EMIs due to moratorium, and to compensate the lender fully for the same. The IRR for the loan after restructuring should, in principle, be the same as that before restructuring. Hence, there should be no impact on the EIR.

41. What will be the impact of the moratorium for accounting for income during the holiday period?

As the EIR remains constant, there will be recognition of income for the entire Holiday period. For example, for the month of March, 2020, interest will be accrued. The carrying value of the asset (POS) will stand increased to the extent of such interest recognised. In essence, the P/L will not be impacted.

42. If the moratorium is a case of “modification of the financial asset”, is there a case for computing modification gain/loss?

As the EIR remains constant, the question of any modification gain or loss does not arise.

43. Does the “modification of the financial asset”call for impairment testing?

The contractual modification is not the result of a credit event. Hence, the question of any impairment for this reason does not arise.

Impact in case of securitisation transactions

44. There may be securitisation transactions where there are investors who have acquired the PTCs. The servicing is with the originator. Can the originator, as the servicer, grant the benefit of the moratorium? Any consent/concurrence of the trustees will be required? PTC holders’ sanction is required?

Servicer is simply a servicer – that is, someone who enforces the terms of the existing contracts, collects cashflows and remits the same to the investors. Servicer does not have any right to confer any relaxation of terms to the borrowers or restructure the facility.

While the moratorium may not amount to restructuring but there is certainly an active grant of a discretionary benefit to the borrowers. In our view, the servicer by himself does not have that right. The right may be exercised only with appropriate sanction as provided in the deed of assignment/trust deed – either the consent of the trustees, or investor’ consent.

45. Irrespective of whether the moratorium is granted with the requisite consent or not, there may be some missing instalments or substantial shortfall in collections in the months of April, May and June. Is the trustee bound to use the credit enhancements (excess spread, over-collateralisation, cash collateral or subordination) to recover these amounts?

As we have mentioned above, the grant of the moratorium by the servicer will have to require investor concurrence or trustee consent (if the trustee is so empowered under the trust deed/servicing agreement). Assuming that the investors have given the requisite consent (say, with 75% consent), the investors’ consent may also contain a clause that during the period of the moratorium, the investors’ payouts will be deemed “paid-in-kind” or reinvested, such that the expected payments for the remaining months are commensurately increased.

This will be a fair solution. Technically, one may argue that the credit enhancements may be exploited to meet the deficiency in the payments, but utilisation of credit enhancements will only reduce the size of the support, and may cause the rating of the transaction to suffer. Therefore, investors’ consent may be the right solution.

Impact in case of direct assignment transactions

46. There may be direct assignment transactions where there is an assignee with 90% share, and the assignor has a 10% retained interest. Can the assignor/originator, also having the servicer role, grant the benefit of the moratorium? Any consent/concurrence of the assignee will be required?

In our view, the 10% retained interest holder cannot grant the benefit without the concurrence of the 90% interest holder.

47. What will be the impact of the moratorium on the assignee?

Once again, as in case of securitisation transactions, if the grant of the moratorium takes place with assignee consent, the assignee may agree to give the benefit to the borrowers. In that case, the assignee does not have to treat the loans as NPAs merely because of non-payment during the period of the moratorium.

Impact in case of co-lending transactions

48. In case of a co-lending arrangement, can the co-lenders grant differential benefit of the moratorium?

Since the grant of moratorium is discretionary, the co-lenders may intend to grant different moratorium periods to the same borrower. However, that could lead to several complications with respect to servicing, asset classification etc. Hence, it is recommended that all the parties to the co-lending arrangement should be in sync.

 

 

[1] https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR21302E204AFFBB614305B56DD6B843A520DB.PDF

[2] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11835&Mode=0


Our other write-ups relating to covid-19 disruption can be read here- http://vinodkothari.com/covid-19-incorporated-responses/

Other write-ups on NBFCs can be read here- http://vinodkothari.com/nbfcs/

63 replies
  1. Fernando
    Fernando says:

    Hi, say for example, if an organisation has requested for Moratorium to a lender and the lender takes a couple of days to grant the moratorium due to internal process and meanwhile there have been payments due on Apr 3rd which the borrower has not repaid anticipating a backdated Moratorium from e.g. Mar 27. The moratorium is now granted on 5-Apr. Can they charge penalty for non payment on 3-Apr ?

    Reply
    • Qasim Saif
      Qasim Saif says:

      The time lag between application and grant of moratorium depends on the internal processing by the lender. Here, the delay is not on account of the borrower, but the lender. Hence, in our opinion the lender should not charge penalty for the period of delay merely due to its internal processing.

      Reply
  2. Nagarajan Elumalai
    Nagarajan Elumalai says:

    Hi Vinod,

    For Example: We are having loan with some lender with condition to repay interest on quarterly basis, for 1st Quarter of 2020-2021 how will will consider TDS part?

    01-Apr-20 to 13-May-20 TDS is 10%
    from 14-May-20 it will be 7.5%

    My due lies on 30-Jun-2020, How i need to go with it and which TDS rate i should take?

    Reply
  3. Nagarajan Elumalai
    Nagarajan Elumalai says:

    Hi Vinod,

    In moratorium period, Interest accrued/due can be capitalize with principal. here my query is, Gross Interest to be added with principal or Net interest (After TDS) to be added., Pls clarify

    Reply
    • Vinod Kothari Consultants
      Vinod Kothari Consultants says:

      Gross Interest shall be added to the principal. However, in case the customer has paid the TDS, then the lender shall capitalise Net Interest- this is not very likely though given the fact that the interest has not been paid by the borrower but TDS has been deposited.

      Reply
  4. pavan bhandari
    pavan bhandari says:

    Hi..
    Does loan taken under Atmanirbhar Bharat Yojana scheme (collateral free automatic loans for businesses) the exiting collateral to be mortgaged to the Bank on the new loan ??

    Reply
  5. Karan
    Karan says:

    I applied for home loan in aditya birla. The loan was sanctioned. But due to covid lockdown was implied. I recieved a call from bank stating that it has become more than 60 days but no home agreement was done on that sanctioned letter so i will need to do the whole process again. Can anyone please guide me on that. As i Have not done deliberately it was due to the lockdown.

    Reply
  6. Vivek Gupta
    Vivek Gupta says:

    Our account was restructured in March. Is the moratorium available to restructured accounts.
    The bank has denied the same citing the reason that moratorium is only for standard accounts.

    Reply
  7. Ricky Bindra
    Ricky Bindra says:

    Yes sir I hv taken gold loan I hv to pay gold interest every month will my interest rate change as in today’s postion I m not able to pay due all buisness closed

    Reply
  8. Vijay Vithaldas Dhirawani
    Vijay Vithaldas Dhirawani says:

    Sir
    I applied for moratorium to axis Bank but bank rejected my proposal.
    Because they are telling me my account is in deliquent mode.
    But sir in RBI guidelines it’s not mentioned anywhere
    Sir please suggest me

    Reply
  9. SIVANANTHARAJA R
    SIVANANTHARAJA R says:

    I have availed home loan from IIFL,My application number is 761066.I want to accept moratorium period of three months.Due date of repayment of loan is 5th of every month,So you extend 3 months tenure.

    Reply
  10. Vinu
    Vinu says:

    Dear Sir,

    My EMI Date is on 1st week of every month. I have paid my March Month EMI. Later I got this Moratorium information after 20th March . So if I avail this 3 Months Moratorium will my EMI starts from July or I need to pay on June. Please let me know.

    Reply
  11. Manish Tapadar
    Manish Tapadar says:

    I have a home loan from IIFL, can you please provide information about IIFL? Do they accept the moratorium of three months?

    Reply
  12. Veena
    Veena says:

    I have taken 15 days short term loan and my repayment date is on /5th April. Will I get an exemption to pay latter due to this situation ?

    Reply
  13. saurabh khanna
    saurabh khanna says:

    Loans given to individuals under loan against securities whereby loan are given as bullet repayment for 12 months with clause of another 24 months revolving facility…interest is paid monthly. Since technically they r not working capital loans nor like normal emi loans how to treat them for morat.

    Reply
    • Vinod Kothari
      Vinod Kothari says:

      To reiterate a point that have made here, no lending institution is bound to grant a moratorium. The grant of the moratorium is a matter of contract between the lender and the borrower. So, if you want to contend that in the case above, you are not required to offer a moratorium, there cannot be any objection. On the other hand, if you want to hold that the moratorium is the result of a disruption, which will affect most financial obligations, then the case above is no different. In our view, the case above will be covered by the scope.

      Reply
  14. Vikas Kumar
    Vikas Kumar says:

    If i have taken loan from HDFC and EMI is being deducted from ICICI bank through ECS, How it will stop, will it stop automatically, should i need to call them and ask them to stop ECS. Also, if i am having credit card dues from HDFC bank or some other bank, how it will work, will they consider automatically, can i stop paying for three months and moratorium period will be between 1st April to 1 July, 2020??
    Please suggest

    Reply
  15. Vikram
    Vikram says:

    Request one clarity, If a term loan account is NPA on 1st March (90-120 bucket) with moratorium permitted for subsequent emi, whether collection of one emi in March month will help to roll back the account to 60-90 bucket at March end?

    Reply
  16. Lami P
    Lami P says:

    Sir,
    Do we have to apply to the concerned bank to grant us the moratorium of 3 months ? Or they will do it automatically

    Reply
    • Abhirup Ghosh
      Abhirup Ghosh says:

      That would depend on the policy adopted by the respective lenders. Some are reaching out to the borrowers, while others are waiting for the customers to approach them. In case, you have have received any communication from your lender, then you may consider approaching them.

      Reply
  17. Adv Rajesh kumar TK, Kochi
    Adv Rajesh kumar TK, Kochi says:

    My client have entered in to OTS scheme and initial amount also paid. But as per the OTS settlement the next payment is due on 31:3/20, by tomorrow. The next payment is due only now he next financial year
    Can the present Moratorium is applicable
    to my client, as he is under the present Corona crisis?

    Reply
    • Anita Baid
      Anita Baid says:

      The moratorium can be extended in case of bullet repayment loans as well- this would further depend on the lender’s policy

      Reply
  18. Devesh Malviya
    Devesh Malviya says:

    How does the moratorium affects the preshipment and post shipment credit facilities? these are foreign currency denominated facilities with a fixed maturity and can’t be refinanced with CC lines?

    Reply
  19. Rohit
    Rohit says:

    Point 16 & 28 seems contradictory to each other, can you please clarify more precisely.
    As per understanding, NPA clock should not stop for those accounts which is already in overdue status (eg 60 days overdue as on March 1, 2020) and should turned NPA as on March 31, 2020.

    Reply
    • Anita Baid
      Anita Baid says:

      The whole intent behind the moratorium is the disruption in the system due to an externality. If the borrower had an instalment which was 30 days past due on 1st March, it cannot be contended that he will have difficulty in paying his current dues but will have no difficulty in paying what had already become due. But for the systemic disruption, it could well have been that the borrower would have cleared all his dues.

      The meaning of the moratorium is that payments do not fall due during the period of the moratorium – whether current or past. Therefore, the moratorium period cannot result into ageing of the past dues. Of course, if the past dues are an overdue rate, the overdue rate may continue. But for the purpose of counting DPD, the moratorium period will have to be excluded.

      Reply
  20. preksha sharma
    preksha sharma says:

    Bank officials have informed me that My account will be classified as NPA on 31st March 2020 since my EMI is due for Dec, 2019, this circular is not applicable for me. Can bank start the npa proceedings in this period?

    Reply
  21. Bijender Singh
    Bijender Singh says:

    RBI circular mention that EMI will shift by three months after moratorium period. Does it mean, EMI due on 1 March shall now become due on 1 Sep i.e. by six months ( 3 months Moratorium and three months shift thereafter). Is this interpretation correct.

    Reply
    • Narendra Tiwari
      Narendra Tiwari says:

      No, you have to start paying your EMI from 1st June 2020, further please do note that you have to pay accumulated interest after 3 months i.e on 1st June 2020. So if you have liquidity to continue your EMI please continue. Since your interest will be high after 3 months.

      Reply
  22. Jagadeesha
    Jagadeesha says:

    Dear Sir,
    On 27-03-2020 threr is press release on “Statement of Development” in which it is mentioned that all india financial institutions and NBFC (including housing finance and micro finance), where circular issued on the same “COVID-19 package” dated on 27-03-2020 it was mentioned that All india financial institutions and NBFC (Including housing finance) in which Micro finance had not mentioned. My question is loan moratorium is applicable only for NBFC housing finance and not for Micro finance institutions. Kindly clarify is it applicable for Micro finance institutions

    Reply
  23. Vinita Jain
    Vinita Jain says:

    Hi
    Thanks for the detailed analysis.
    Want to know the treatment of accrued interest.
    Accrued inerest can be collected in next instalments due in 2020-21?
    Can it be capitalised, meaning that added to principal…Thus EMI changes.
    If we keep EMI unchanged..that means the repayment schedule will move beyond 3 months. Though accrual is allowed for interest, in this situation the recovery of the accrual spreads for over a long period.. Basically in home loan cases may be over 240 months. Does it mean that balance sheet will show interest receivable for so many years. Kindly advice how to handle interest receivable entry.

    Reply
    • Vinod Kothari
      Vinod Kothari says:

      Your perspective is correct. There are 2 ways of handling accrued interest – capitalise it, and therefore rework the EMIs, so the accrued interest gets installmentalised.
      Second way is to take the accrued interest as N+1th instalment (N referring the remaining term). You are also right that in case of long-tenure loans, the interest on that accrued interest will keep accumulating, and if the amount is deferred for a long time, it may become heavy.
      Therefore, you have the option. However, in our view, changing instalments leads to lot of changes – the standing instructions or PDCs, etc.
      In case of home loans, there is a clause for passing on interest rate variation – this is typically handled by changing the last instalment, or modifying the tenure by adding a few instalments at the tail of the contract. Hence, the existing practice of modification of term may be followed.

      Reply
  24. Vallari Dubey
    Vallari Dubey says:

    Hi! What should be the comprehensive scope of the board approved policy? Is it only limited to working captial facilities? Kindly suggest the modality of such policy. Further, given that there is no timeline mentioned, what is expected in terms of compliance?

    Reply
  25. Vandita Kaul
    Vandita Kaul says:

    Point 7 mentions that the moratorium can be lesser than 3 months. If a company chooses to give moratorium up to 31st may only, then a customer whose bullet repayment was 25th may , will hardly get any benefit. Will this not be against the intent of RBI permitting moratorium? Plus this is also not clear from circular. Please help in clarifying

    Reply
    • Anita Baid
      Anita Baid says:

      In case the lending institution decides to provide a moratorium of say 1 month only for all the installment falling due between March 1, 2020 to May 1, 2020, all payment dates shall be deferred by one month. Accordingly, the due date of May 25th shall have a moratorium till June 25th.

      Reply
  26. Ramesh
    Ramesh says:

    Did u mean that bank cannot declare npa of any kind whether due to emi or cc or od limit expires or credit card also.

    Reply
    • Anita Baid
      Anita Baid says:

      The delay in payment for such loan accounts where moratorium has been granted shall not be considered as default and hence, they shall not be classified as NPA.

      Reply
    • Anita Baid
      Anita Baid says:

      In case of standard loan, the moratorium period will not be considered for computing default and hence, it will not result in asset classification downgrade. Accordingly, there will not be any impact on the provisioning.

      Reply
  27. Manish
    Manish says:

    My cc account declared npa by bank on 26.3.20 before 1day of policy due to non renewal of cc limit within 180 days of last review.bank refuse to renew due to low turnover.intetest paid till date.no overdue interest till date .bank can gave notice under sarfaesi act or can i get more time due to lock down so that i can shift loan to another bank.loan value 10 laca martgage 50 l.can i appeal under ibc because loan amount is under 1 crore or have to face sarfaesi act 13(2).no clarity about npa working capital in this policy .my

    Reply
  28. aditya baid
    aditya baid says:

    Thats a great and accurate snapshot of the situation in hand.
    If there is a draft available in hindi , kindly share that as well. It will he helpful for customer of MFI and bottom pyramid NBFC’s. Thanks

    Reply
      • Anita Baid
        Anita Baid says:

        refer answer to Q19

        An NBFC may assess where the disruption is likely to adversely impact the repayment capacity of the borrower and take a call based on such assessment. For example in case of farm sector borrowers and daily wage earners, the disruption will be maximum. However, a salaried employee such as someone working in the IT sector may not be facing any impact on their repayment capacity.

        Reply

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