Team Financial Services, Vinod Kothari Consultants P Ltd.
[Published on April 17, 2020 and updated as on May 6, 2020]
The nationwide lockdown was imposed by the Government of India from March 25, 2020. Since then, the RBI has taken a number of steps to ensure normal business functioning by the entire banking sector. The first address by the RBI governor on March 27, 2020 introduced several measures to deal with the disruption including, grant of a three months moratorium on term loans and the infusion of liquidity by way of TLTRO scheme.
The RBI Governor’s address on April 17, 2020 is intended to introduce further measures to maintain adequate liquidity in the financial system, facilitate and incentivise bank credit flows and ease financial stress. Subsequently, the RBI has issued a Notification on the issue.
Below is an analysis of the second round of regulatory relief granted by the RBI. As for the moratorium on loan payments provided by the March 27 notification, we have covered the same at length- see write-up here–
For the ease of reading we have divided the FAQs into broad categories. We shall keep on updating the FAQs based on the detailed guidelines and clarifications issued by RBI in this regard, from time to time.
Targeted Long Term Operations (TLTRO) 2.0
1. What is TLTRO?
Targeted Long Term Repo Operations or TLTRO, is a variation of LTRO, launched by the RBI in order to manage the liquidity in the financial sector. The TLTRO is a much refined version of LTRO, through which the RBI attempts to extend liquidity in targeted segments, in this case, the NBFCs. TLTRO was introduced first time on February 27, 2020 by the RBI, where it had promised repo auctions worth Rs. 1 lakh crore. Until this press release, RBI has already conducted three repo auctions injecting a total Rs. 75,041 crores worth to ease liquidity constraints in the banking system and de-stress financial markets.
Our detailed write up on the subject can be read here.
2a. What are the avenues in which the funds availed by banks under TLTRO 2.0 can be invested?
As stated above, the main intention behind TLTRO is to inject liquidity in the financial system. As per the notification issued by the RBI for TLTRO 2.0 the funds raised through TLTRO have to be invested in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs. Further, the funds raised through these auctions have to be deployed within a maximum period of 1 month.
2b. What is the prescribed timeline for deployment of funds under the scheme?
Based on the feedback received from banks and taking into account the disruptions caused by COVID-19, the time available for deployment of funds under the TLTRO 2.0 scheme has been extended from 30 working days to 45 working days from the date of the operation.
2c. What happens if a bank fails to deploy the funds availed under the TLTRO 2.0 scheme in specified securities within the stipulated timeframe?
Funds that are not deployed within this extended time frame will be charged interest at the prevailing policy repo rate plus 200 bps for the number of days such funds remain un-deployed. The incremental interest liability will have to be paid along with regular interest at the time of maturity.
3a. Is there a minimum investment limit for small and medium NBFCs?
At least 50 per cent of the total amount availed must be invested in small and mid-sized NBFCs and MFIs.
3b. Will the specified eligible instruments have to be acquired up to fifty per cent from primary market issuances and the remaining fifty per cent from the secondary market?
There is no such condition applicable for funds availed under TLTRO 2.0.
4. What is the criteria to be classified as a small or medium sized NBFC?
Small NBFCs: NBFCs having an asset size of Rs. 500 crore or below
Medium sized NBFCs: NBFCs having asset size between Rs. 500 crores and Rs. 5,000 crores.
5. For the purpose of determining the aforesaid asset based criteria, the asset size shall be considered as on which date?
The asset size shall be determined as per the latest audited balance sheet of the investee institution/company.
6. How will the 50% be appropriated among small NBFCs, medium NBFCs and NBFC MFIs?
The 50% shall be apportioned as given below:
- 10% – securities/instruments issued by Micro Finance Institutions (MFIs);
- 15% – securities/instruments issued by NBFCs with asset size of Rs.500 crore and below;
- 25% – securities/instruments issued by NBFCs with assets size between Rs.500 crores and Rs.5,000 crores.
7. How will the asset size be determined for the purpose of the aforesaid limits?
The asset size shall be determined as per the latest audited balance sheet of the NBFC.
8. When will the first auction under TLTRO 2.0 be conducted?
The first auction under TLTRO 2.0 will be conducted on April 23, 2020. The auction window will open for a period of one hour from 10:30 am to 11:30 am.
9a. How will the Investments made by the banks, under this scheme be classified?
Investments made under this facility will be classified as held to maturity (HTM) even in excess of 25 percent of total investment permitted to be included in the HTM portfolio. Exposures under this facility will not be reckoned under the Large Exposure Framework (LEF).
9b. Will the specified securities acquired from TLTRO funds and kept in HTM category be included in computation of Adjusted Net Bank Credit (ANBC) for the purpose of determining priority sector targets/sub-targets?
In order to incentivise banks’ investment in the specified securities of these entities, it has been decided that a bank can exclude the face value of such securities kept in the HTM category from computation of adjusted non-food bank credit (ANBC) for the purpose of determining priority sector targets/sub-targets. This exemption is only applicable to the funds availed under TLTRO 2.0.
10. What is the maturity restriction on the securities to be acquired under the scheme?
As per the FAQs released by the RBI for TLTROs, there is no maturity restriction on the securities. However, the outstanding amount of securities purchased using the funds availed under TLTRO should not fall below the amount availed under TLTRO scheme. This implies that the securities purchased should be maintained in the bank’s HTM portfolio at all times till maturity of TLTR.
11. How can an NBFC apply to avail the benefit under the scheme?
The funds injected through these auctions are ultimately meant for the NBFCs. NBFCs intending to utilise the benefits of this scheme will have to apply to banks, participating in these auctions, with their proposal to subscribe to the permitted instruments issued by them.
12. From where can an NBFC avail the refinancing facility?
RBI has provided special refinance facilities for an amount of Rs. 15,000 crore to SIDBI for on-lending/refinancing.
13. Is there anything earmarked for HFCs?
Yes, the RBI has announced a special refinancing facility of Rs. 10000 crores for the National Housing Bank which will be used only to refinance the housing finance companies.
14a. What will be the lending rate for such a refinance facility?
Advances under this facility will be charged at the RBI’s policy repo rate at the time of availment.
14b. Can all NBFCs avail the finance under the Special Liquidity Support Scheme?
The Scheme has three segments, out of which, two segments are for NBFCs and one for SCBs and SFBs.
The first part of the Scheme is for NBFC-ICCs and the second part of the Scheme is for NBFC-MFIs. The eligibility criteria for these two categories of NBFCs have been discussed below:
- NBFC-ICC or NBFC-MFI ( In case of MFIs, they may be registered as society, trust or section-8 company)
- Carrying on the business of an NBFC for the past 3 years;
- Minimum NOF- 20 crores;
- Minimum Asset size- 50 crores;
- Minimum investment grade rating (BBB- or above); In case of MFI, also have minimum MFI grading of “MfR5”
- Compliance with all regulatory requirements;
- NBFC/ any of its promoters must not be in RBI’s defaulter/blacklist list;
- Statutory CRAR is maintained at all times during the past 24 months.
14c. For what purpose, the finance availed from such scheme can be used?
The funds availed can be used for on-lending to MSMEs by the NBFCs and microfinance borrowers by NBFC-MFIs.
14d. What will be the tenor of such facility?
The tenor for such facility shall be 90 days,with a bullet repaymentat the end. Usually, the loans to MSMEs are more than 90 days tenor, therefore, the question is – if the tenor of the loans extended by the NBFCs are more than 90 days, how will the funds obtained under this Scheme be refunded timely. The logical answer to this question is that the NBFCs will have to arrange for alternative financing sources during these 90 days and use the funds to repay the facility under this Scheme. Therefore, it seems that the intent is to provide a bridge funding facility to the NBFCs for the time being.
Further, SIDBI has vide circular dated April 24, 2020, extended the repayment period of loans to NBFCs and MFIs, to one year from the 90-day period.
14e. Whether such facility will be secured?
The nature of the loans shall be based on the existing norms of SIDBI.
14f. Is there any cap on processing fee?
The processing fee shall be 0.10 % of the sanctioned loan amount subject to a maximum of Rs. 5 lakhs (including GST).
14g. How can NBFCs apply to avail benefit of such scheme?
There is no prescribed procedure for making application to SIDBI for availing funds under such scheme. Eligible NBFCs may apply to SIDBI to avail funds from the scheme.
15. What is meant by asset classification standstill?
Asset classification standstill means there will be no movement, deterioration or upgradation, in the asset classification during a given period of time. In the given context, the ageing of the loan default, that is, the days past due (DPD) status, will remain on a standstill mode, as if the time clock has stopped running during the period of the moratorium.
Our detailed write up on the issue can be read here.
Our analysis of the Delhi HC and Bombay HC ruling in this regard may also be read here.
16. How to determine the qualifying loan accounts for relaxation under this circular?
All loan accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020.
17. The loan moratorium notification came on 27th March. For many companies, the payment for March was, say, due on 5th March. Therefore, the moratorium was effectively granted only for the payments due on 5th April and 5th May. Does such NBFC still have the right to keep the NPA clock on hold for accounts which were in default on 1st March, 2020?
In our view, the moratorium period uniformly began for all financial institutions on 1st March and continues upto 31st May. The moratorium is the result of an external event – hence, it is not something which is based on entity-level payment schedules. That the borrowers have paid the instalments due on 5th March does not impact the moratorium – moratorium simply implies the customer has the option of not paying, but he has chosen to pay, that is his discretion.
Therefore, in this case in point, the NPA clock will still be on hold from 1st March to 31st May.
18. How will the asset classification be carried out?
As per the guidelines provided by the RBI, the asset classification relaxation is provided only if the account was to move from standard to sub-standard category during the moratorium period from March 1, 2020 to May 31, 2020. However, if the account was within the NPA category already, the benefit of the relaxation will not be available.
Effectively the circular stalls the dip in the asset classification by 3 months.
19. To what installment dues does the relaxation apply?
The relaxation applies to:
- Dues payable between 1st March, 2020 and 31st May, 2020
- Dues payable before 1st March that are classified as standard as on 1st March
- Dues payable after 31st May, will be covered by the existing instructions with regard to NPA recognition unless the lender grants a voluntary relaxation in accordance with the RBI Guidelines
20. Does a standard loan account as on March 1, 2020 include SMA classified accounts?
In case of assets showing signs of distress as on March 1, 2020, such as SMA1 and SMA2, the relaxation will still be available since they are classified as standard assets.
21. Will the standstill be applicable in case of extension of the EMI dates for installments falling due after May 31, 2020?
The standstill will be applicable for all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020.
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 borrowers and not any individual borrower. Hence, this would not be considered as “restructuring” and will not require any asset classification downgrade merely because of restructuring. However, if the borrower does not pay the “restructured debt” as well, then asset classification norms will apply.
22. An NBFC has the following borrower accounts with DPDs marked, how will the NPA classification be impacted in case of non-payment
|DPD as on March 01, 2020||NPA declaration (in case moratorium has been granted)||NPA declaration (in case moratorium has not been granted)|
|0||31st August, 2020||31st May, 2020|
|30||31st July, 2020||30th April, 2020|
|60||30th June, 2020||31st March, 2020|
|90||1st March, 2020||1st March, 2020|
|120||Already NPA||Already NPA|
23. Will the delayed instalments accrue in the books of accounts?
The accounting entries with regard to accrual of the instalments will depend on the grant of moratorium, that is, accrual will happen as per the modified contractual terms. However, as regards income recognition, NBFCs that have moved to IndAS recognise income based on the “effective interest rate” method. As long as the effective interest rate has been maintained after restructuring, income recognition will continue at that rate, even during the moratorium period.
24. Can a lender take enforcement action on account of non-payments during the breather period?
In case there was a default, and there were remedies available to the lender as on 1st March already, the same will not be affected.
As regards the period of moratorium, since the contractual obligation of the borrower has been modified, there is no default unless the borrower defaults on the restructured obligations.
As regards the use of powers under SARFAESI, the same depends on “NPA classification” in books of account. Since the loan will not be classified as NPA, there will be a bar on SARFAESI action as well.
25. Para 5 of the RBI Notification talks about a provisioning requirement. This, on first reading, seems to suggest that the provisioning requirement will be applicable to all the loans which have been given the benefit of moratorium. Is this understanding correct?
No, this understanding is not correct. Note the words “In respect of accounts in default but standard where provisions of paragraphs (2) and (3) above are applicable, and asset classification benefit is extended, lending institutions shall make general provisions of not less than 10 per cent of the total outstanding of such accounts.. [Emphasis supplied].
The meaning of this is not to include every loan which was >0 DPD on 1st March. The intent of this is only such loans, which, but for the standstill of the asset classification, would have turned into NPA.
In case of March 31, 2020 quarter, only loans which were at least 60 DPD on 1st March would have become NPA. Therefore, 5% general provisioning will be required only for such loans as were >59 DPD on 1st March, 2020.
26. There are some who have argued that the 10% general provision (spread over two quarters) will be applicable to both SMA1 as well as SMA2. Do you agree with this view?
Respectfully, we do not agree with this view. This view will be counter-intuitive. There is no provisioning required until the asset reaches substandard status. An account which was SMA1 (>30 days on 1st March) would not have become NPA on 31st March. Hence, the question of any degradation to NPA would not have arisen. Nor would there have been any provisioning requirement (except for the 0.40% required for all assets). The moratorium has not made the SMA1 loans worse in any manner. Therefore, there is no question of the RBI obliging banks to make a provision, which was not required before the 17th April Notification.
The 5% provision (for Q4 of 2020) may only be applicable where, but for the 17th April notification, the account would have become NPA. That would be the case in case of those accounts which were SMA2 on 1st March, 2020.
Note: A substantial confusion was prevailing on this issue. We had given a precise reasoning for our view above. As per a Report, the RBI also eventually seems to have agreed to our view above. That is, the general provisioning requirement is applicable, as on 31st March, 2020, only to those accounts which were SMA2 on 1st March, 2020.
27. What about the quarter of 30th June, 2020?
The quarter of June 30 may be a tough one. The general provisioning requirement is to be spread over 2 quarters. Hence, the situation may be illustrated in the Table below:
Position as on 31st March, 2020
|DPD as on March 01, 2020||DPD on 31st March, 2020||Whether 5% general loss provision in the Q4, 2020 required?|
|30||61||No, because there would have been no slippage of asset classification, even in absence of the Notification|
|60||91||Yes, 5% general loss provision required|
|90||121||Account was an NPA; 10% provision required|
Position as on 30th June, 2020
|DPD as on March 01, 2020||DPD on 30th June, 2020||Explanation||Whether 5% general loss provision in the Q4, 2020 required?|
|0||91||During the moratorium, from 1st March to 31st May, customer paid nothing. In June, customer pays one months’ payment||There was no payment obligation during the moratorium since there was a loan modification. There was no default on 1st March. The customer has cleared his obligations of June. Hence, the account is completely in order – the 90 DPD is actually the obligations during moratorium, which has been deferred. No provisioning at all|
|30||121||The customer did not clear his default of 30 days which was past due on 1st March. When the moratorium is over, he pays one single instalment of loan.||Based on FIFO principle, the obligation that was past due on 1st March has been cleared on 30th June. Nothing became due during March, April and May. Hence, this loan has not taken the benefit of standstill. Hence, no general provision required.|
|60||151||The customer has paid only one instalment in June, whereas, on 1st March, he has obligation to pay for 2 months. Therefore, obligation as on 1st March achieves a vintage of at least 120 days on 30th June.||There was a provision of 5% already made in Q4, 2020. An additional 5% general loss provision will be required in Q1, 2021.|
|90||181||The account was already an NPA||Not covered by general loss provisions.|
28. What is the meaning of general loss provision? How is it different from a provision for NPAs?
General loss provision is a general prudential provision. It does not cause the value of gross assets to be reduced. It does not require the asset to be classified as an NPA. The general loss provision will be treated as a part of Tier 2 capital.
29. Is it proper to say that the general provisioning requirement of the 17th April notification creates a pressure on the regulatory capital of banks?
The general loss requirement certainly hits the revenues of the banks, but it is treated as a part of Tier 2. Hence, essentially, what is happening is, the provision eats into Tier 1 capital, but fills the same in Tier 2. If the bank had inadequate or potentially weak Tier 1, the general loss provision will create an issue.
30. Will there be any impact on the provision for accounts already classified as NPA as on February 29, 2020?
The provisions for accounts already classified as NPA as on February 29, 2020 as well as subsequent ageing in these accounts, shall continue to be made in the usual manner.
31. Will the reporting to CICs also come to a standstill due to the standstill of asset classification?
There will be no reporting to CICs since the SMA status, where applicable, as on March 1, 2020 will remain unchanged till May 31, 2020.
32. What are the disclosure requirements to be ensured by the lender?
The lending institutions shall suitably disclose the following in the ‘Notes to Accounts’ while preparing their financial statements for the half year ending September 30, 2020 as well as for FY 2019-20 and 2020-2021:
(i) Respective amounts in SMA/overdue categories, where the moratorium/deferment was extended;
(ii) Respective amount where asset classification benefits is extended;
(iii) Provisions made during the Q4FY2020 and Q1FY2021;
(iv) Provisions adjusted during the respective accounting periods against slippages and the residual provisions.
Impairment requirement for NBFCs
33. What is the relevance of para 17 of the Governor’s statement as regards NBFCs? Is it giving discretion to NBFCs regarding how much moratorium can they offer?
Para 17 of the Governor’s statement (relevant part) reads:
“NBFCs, which are required to comply with Indian Accounting Standards (IndAS), may be guided by the guidelines duly approved by their boards and as per advisories of the Institute of Chartered Accountants of India (ICAI) in recognition of impairments. In other words, NBFCs have flexibility under the prescribed accounting standards to consider such relief to their borrowers.”
In our view, this has nothing to do with the grant of the moratorium or the standstill on asset classification.This para deals with the recognition of impairment losses, that is, ECL provisions, in the books of those NBFCs which have adopted IndAS 109.
So, to summarise:
- Moratorium period, 1st March to 31st May, is consistent for all financial entities, including banks.
- The standstill provisions are also the same for NBFCs.
- As regards ECL provisions, NBFCs may be guided by accounting guidance.
34. What are the guidelines for recognition of impairments/ECL?
IFRS Foundation has given the following guidance on computation of ECL due to impact of the coronavirus:
“Entities should not continue to apply their existing ECL methodology mechanically. For example, the extension of payment holidays to all borrowers in particular classes of financial instruments should not automatically result in all those instruments being considered to have suffered an SICR” (SICR stands for significant increase in credit risk).”
There have been similar statements from the Basel Committee of Banking Supervision (BCBS) where they have stated the following:
“Banks should use the flexibility inherent in these frameworks to take account of the mitigating effect of the extraordinary support measures related to Covid-19.”
“Regarding the SICR assessment, relief measures to respond to the adverse economic impact of COVID-19 such as public guarantees or payment moratoriums, granted either by public authorities, or by banks on a voluntary basis, should not automatically result in exposures moving from a 12-month ECL to a lifetime ECL measurement.”
As regards ICAI, ICAI has given a common guidance on impact of the pandemic on IFRS. This states: “As a guidance from Appendix A of Ind AS 109: Borrower specific concession(s) given by lenders, on account of economic or contractual reasons relating to the borrower’s financial difficulty, which the lenders would not have otherwise considered. Such a condition to be considered as evidence that a financial asset is credit-impaired.”
The restructuring as permitted by the regulators is not a case of borrower-specific concession. It is given to all borrowers across.
Hence, this by itself cannot be a reason for any movement in the DPD bucket.
Extension of Resolution Timeline
35. What are the existing timelines for resolution of stressed assets?
As per the prudential framework for resolution of stressed assets, once an account defaults, a Review Period of 30 days becomes operational. The resolution plan is to be implemented within 180 days after the Review Period. In case of failure to implement the resolution plan within the said 180 days, an additional provision of 20% of the amount outstanding in the account has to be maintained by the lender.
36. Will there be any impact on the Review Period?
The notification issued by the RBI providing extension of 90 days for implementation of resolution plan also provides for a stay on the Review Period. Accordingly, if an account was under review period on March 1, 2020, the Review Period of 30 days shall freeze until May 31, 2020. The calculation of residual Review period shall start from June 01, 2020.
Further, through another notification on May 23, 2020 the RBI extended the period of stay to August 31, 2020. Accordingly, the review period shall resume from September 01, 2020.
37. What will happen to the accounts whose Review Period has expired but the resolution plan has not been implemented?
For accounts whose Review Period has expired, but the timeline of 180 days for implementing the resolution plan has not expired as on March 1, 2020, the timeline shall be further extended by 90 days.
38. What will be the implication of extending the period for the resolution plan by 90 days?
Given the current circumstances, delay in implementation of the resolution plan may be due to factors beyond control of the lender. Hence, due to the extension of the said timeline by 90 days, the requirement of maintaining additional provision of 20% gets delayed.
39. Will the deferment of creation of this provision aid the liquidity position of the lenders?
Since, the requirement of maintaining additional provision of 20% gets delayed, the lenders will have relatively more liquidity in hand at this time when liquidity is needed the most.
40. Will the lender be required to hold an additional provision of 20 per cent if a resolution plan has not been implemented within 210 days from the date of such default?
No, the lender would not be required to hold additional provision of 20% if the resolution plan is not implemented within 210 days.
However, if the resolution plan is not implemented within 210+90= 300 days, an additional provision of 20% would have to be maintained.
41. Are there any disclosure requirements in this regard?
The notification requires the NBFCs to make relevant disclosures in respect of accounts where the resolution period was extended, in the ‘Notes to Accounts’ while preparing their financial statements for the half year ending September 30, 2020 as well as for FY2020 and FY2021.
NBFC Loans to Commercial Real Estate Projects
42.Which loans are defined as loans to Commercial Real Estate Projects?
The definition of loans to Commercial Real Estate has been aligned to Basel II norms, which is based on the source of loan repayment. As per the definition, if the repayment primarily depends on other factors such as operating profit from business operations, quality of goods and services, tourist arrivals etc., the exposure would not be counted as Commercial Real Estate (CRE).
Thus, whether a loan can be defined as a loan to CRE is a subjective matter and would require understanding of the business of the borrower, use of the loan proceeds etc.
43. What are the existing parameters for considering a loan to the commercial real estate sector as restructured?
As per the existing norms, the Date of Commencement of Commercial Operations (DCCO) shall be clearly spelt out at the time of financial closure of the project and the same shall be formally documented. In case the DCCO is extended beyond a period of one year from the predetermined DCCO or the terms of the loan are revised with a motive to provide the borrower with some relief during times of stress, the account is said to be restructured.
Upon restructuring, an account classified as standard would immediately become sub-standard i.e. the asset classification of the account has to be downgraded on restructuring.
44.What do the revised guidelines propose?
In line with the guidelines for banks, the NBFCs are now allowed to extend the DCCO for reasons beyond the control of promoters by an additional one year, over and above the one-year extension permitted in normal course, provided the revised repayment schedule is not extended more than the extension in DCCO .
45. What would be the impact of such an extension?
Considering the current situation, many of the commercial real estate projects may fail to initiate operations for a while. Due to this, the DCCO is likely to extend. As per the existing guidelines, if the DCCO extends for a period above 1 year, the account would become restructured and thus the asset classification would degrade. This would result in accumulation of lower grade assets into the books of NBFCs.
Allowing a time period of 2 years from the predetermined DCCO would provide the borrower with enough time to get back into operations and at the same time the asset classification would not be downgraded in the books of the NBFC.
 During this Review Period of thirty days, lenders may decide on the resolution strategy, including the nature of the RP, the approach for implementation of the RP, etc.