– RBI Governor’s Statement settles an unwarranted confusion
Timothy Lopes, Executive, Vinod Kothari Consultants
In the wake of the disruption caused by the global pandemic, now pitted against the Great Depression of 1930s and hence called The Great Lockdown, several countries have taken measures to try and provide stimulus packages to mitigate the impact of COVID-19. Several countries, including India, provided or permitted financial institutions to grant ‘moratorium’, ‘loan modification’ or ‘forbearance’ on scheduled payments of their loan obligations being impacted by the financial hardship caused by the pandemic.
The RBI had announced the COVID-19 Regulatory Package on 27th March, 2020. This package permitted banks and other financial institutions to grant moratorium up to 3 months beginning from 1st March, 2020. We have covered this elaborately in form of FAQs.
However, there was ambiguity on the ageing provisions during the period of moratorium. That is to say, if an account had a default on 29th February, 2020, whether the said account would continue to age in terms of days past due (DPD) as being in default even during the period of moratorium. Our view was strongly that a moratorium on current payment obligation, while at the same time expecting the borrower to continue to service past obligations, was completely illogical. Such a view also came from a judicial proceeding in the case of Anant Raj Limited Vs. Yes Bank Limited dated April 6, 2020
However, the RBI seems to have had a view, stated in a mail addressed to the IBA, that the moratorium did not affect past obligations of the customer. Hence, if the account was in default as on 1st March, the DPD will continue to increase if the payments are not cleared during the moratorium period.
Clarification on asset classification by RBI
On 17th April, 2020, the RBI Governor addressed the public and clarified on the above ambiguity, which, of course, was unwarranted, relating to asset classification during the period of moratorium. RBI has now taken the view that there would be an asset classification standstill on all accounts, which were standard as on 1st March, 2020, i.e. the 90-day NPA norm shall not apply.
The RBI Governor in his public address, recognized that the onset of COVID-19 has also exacerbated the challenges for such borrowers even to honour their commitments fallen due on or before February 29, 2020 in Standard Accounts.
Further, RBI Governor noted that the Basel Committee on Banking Supervision (BCBS) had taken cognizance of the financial and economic impact of COVID-19 and very recently announced that “… the payment moratorium periods (Public or granted by banks on a voluntary basis) relating to the COVID19 outbreak can be excluded by banks from the number of days past due” in respect of NPA recognition.
This brings clarity as to the asset classification requirements during the period of moratorium. A standstill would mean that an account which was say, 30 DPD as on 1st March, 2020, would remain 30 DPD by the end of the moratorium period as well. There would be no aging of standard accounts during the period of moratorium.
Accounting guidance for NBFCs
RBI has further clarified that 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. There is also a guidance from IFRS Foundation, which clarifies that payment holidays granted in the wake of the crisis will not be mechanically treated as causing SICR, equivalent of “non-performing asset”
While the para dealing with NBFCs may be a bit unclear, however, the essence is that not only will NBFCs be permitted to keep the asset classification on hold, even the commutation of expected losses under IFRS will also not be affected by the mere fact of the moratorium. That is, even for IFRS purposes, the DPD status of the loan will be on hold. The specific reference to NBFCs is because it is only NBFCs which have currently be migrated to Ind-ASes.
Relief to CRE loans by NBFCs
At present, in terms of the extant guidelines for banks, the date for commencement for commercial operations (DCCO) in respect of loans to commercial real estate projects delayed for reasons beyond the control of promoters can be extended by an additional one year, over and above the one-year extension permitted in normal course, without treating the same as restructuring.
The above was relief only granted to banks and not NBFCs. RBI has now decided to extend a similar treatment to loans given by NBFCs to commercial real estate. This will provide relief to NBFCs as well as the real estate sector.
Moratoriums granted globally –
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. Below is a table showing the details of moratoriums granted globally –
|Features of the Moratorium||Moratorium on Federal student loan borrowers.
Moratorium on foreclosure and customer right to request forbearance.
|Moratorium on SME Loans.
Suspension of mortgage payments by individuals.
|Moratorium on loans to individuals and SMEs and corporate loans.||Moratorium on loan repayments for small business||Moratorium on loan payments by SMEs.||Moratorium to borrowers affected by the coronavirus outbreak.|
|Legislation/ Regulation||CARES Act, 2020||Cura Italia||Bank Negara Malaysia
(Central Bank of Malaysia)
|Australian Banking Association||Bank of Thailand||Royal Decree-Law|
|Eligibility||Student loan Moratorium –
Student loan borrowers.
Federally Backed Mortgage Loan borrowers who have had a financial hardship caused by COVID-19.
|As on March 17, the Company must be performing, i.e. it does not have debt positions classified as impaired exposures, divided into bad loans, probable defaults, past due and / or past due impaired exposures. In particular, it must not have past due instalments (i.e. not paid or paid only partially) for more than 90 days.
Families may apply for a suspension of their mortgage repayment if business shutdowns caused by the pandemic threaten their livelihoods.
|Individuals, SMEs loans denominated in Malaysian ringgit and not in arrears exceeding 90 days as at 1st April, 2020.
Corporate borrowers are also eligible.
|You must have less than $10 million total debt to all credit providers. You need to be current, and not in arrears as of 1 January 2020. It does not matter how many people you employ. Some banks are applying these criteria flexibly, so if you fall outside please contact your bank to discuss your situation.||Loans not exceeding 100 million baht||Those borrowers who have either lost their job or have suffered a reduction in income.|
|Period||Student loan moratorium – All payments due on student loans would be suspended for 3 months.
Mortgage forbearance – Forbearance shall be granted for up to 180 days with an extension of another 180 days upon borrower request.
|SME Loans – up to 30th September, 2020
Mortgage payments – instalments up to 18 months.
|The deferment is only for 6 months.||Six months||Six months||One month|
|Whether interest will accrue or not?||Student loans moratorium – Interest will not accrue on such loans.
Forbearance Plan –
Interest still accrues.
|Unclear.||Interest/profit will continue to be added (accrue) on loan/
financing payments that are deferred and
borrowers/ customers will need to honour the deferred payments in the future. Loan/financing payment resumes
after the deferment period.
|Interest will continue to accrue, it can then be paid off over the life of the loan once repayments begin again, or the length of the loan can be extended.||Unclear.||Unclear.|
|Other features||Student loan –
It will be deemed for each month for which a loan payment was suspended, as if the borrower of the loan had made a payment for the purpose of any loan forgiveness authorized for which the borrower would have otherwise qualified.
Mortgage forbearance –
Servicers are required to remit P&I on scheduled dates regardless of whether it receives payments from borrowers.
|–||All individual and SME loans/financing (excluding credit
cards) that meet the criteria will automatically qualify for the
deferment. No need to apply for the same.
|Australian Prudential Regulatory Authority (APRA) clarified that loans that have been granted repayment deferrals as part of a COVID-19 support package need not be regarded as restructured for borrowers who have been meeting their repayment obligations.||–||The moratorium is not automatic: the borrower must initiate the process.|
 The IMF has introduced a Policy tracker for tracking all policy reforms due to COVID-19 across the globe – https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19
 W.P.(C) URGENT 5/2020