Moratorium 2.0 on term loans and working capital

-Team Financial Services, Vinod Kothari Consultants P Ltd.
(finserv@vinodkothari.com)

This version dated 22nd May, 2020. We shall continue to develop this further based on the text of notification and the clarifications, if any, issued by the RBI.

On 22 May, 2020, as a part of the Statement on Development Regulatory Policies to the notification, the RBI Governor announced an extension, by 3 months, of the moratorium earlier announced on 27th March, 2020, originally from March 1 to 31st May, 2020. This moratorium [let us call it Moratorium 1.0 for the sake of distinction] was clearly intended to address the stress in the financial sector caused by COVID-19, as a part of its Seventh Bi-monthly Policy. Further, the RBI has come up with a Notification titled COVID 19- Regulatory package.

Our detailed FAQs, developed over weeks of discussion with practitioners and experts in the financial sector, are here. These FAQs below must be read in conjunction with the FAQs on Moratorium 1.0.

Moratorium 2.0 versus Moratorium 1.0

1. Is Moratorium 2.0 different from Moratorium 1.0?
It does not seem to be materially different from the earlier version. It seems to be merely an extension of the earlier moratorium.

2. What will be the implication of the extension? Earlier, Lending Institutions had provided a moratorium upto 31st May to the borrowers. Will they have to go for a fresh documentation now for the extended period?
In our view, the moratorium is merely an extension. If the earlier moratorium was implemented by any kind of opt-in documentation, logically, the same or similar documentation would be required for the extension as well.

3. If a borrower had not opted for, or had not been granted a moratorium during Moratorium 1.0, can he be granted moratorium under Moratorium 2.0?
The condition for availing Moratorium 2.0 is that the account should have been standard as on 1st March, 2020. In our view, availment of Moratorium 2.0 is not condition upon the borrower having availed Moratorium 1.0.

4. Has the RBI granted a compulsory extension of the moratorium?
No, the lending institutions have been permitted to allow a moratorium of three more 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. The RBI has simply permitted the lenders to grant an extension of the moratorium.

5. Who are the Lending Institutions covered by Moratorium 2.0?
The coverage is the same as in case of Moratorium 1.0. That is to say, 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 extended moratorium to their respective borrowers.

6. What will be the impact of the extended moratorium in case of term loans?
Moratorium 1.0 was for the period from 1st March, 2020 to 31st May 2020. Now, Moratorium 2.0 extends from 1st June 2020 to 31st August, 2020. That is to say, based on the instalment practice of the concerned Lending Institution, the next instalment will be falling due during the month of September, 2020.
For instance, say, the instalment payment date for a Lending Institution is on 10th of the month. Assuming that the borrower has paid the instalment due on 10th March, 2020. Now, the next instalment date for the borrower will be 10th September, 2020.

7. What will be the impact of the extended moratorium in case of working capital facilities?
In case of working capital facilities, the moratorium will permit the Lending Institution to defer the payment of interest. Usually, the interest falling due during the moratorium will be capitalised, that is, added to the drawn amount. As a result of such capitalisation, if the drawn limit exceeds the maximum drawing limit, such excess will not be taken as making the facility irregular.

Scope and implementation of Moratorium 2.0

8. From what date can the extended moratorium be granted?
In Moratorium 1.0, the lenders were permitted to grant a moratorium of three months on payment of all instalments falling due between March 1, 2020 and May 31, 2020. In the second version of moratorium, the lenders are permitted to extend the same by another 3 months – that is, upto 31st August, 2020.

9. Will the moratorium be applicable in case of new loans sanctioned during the period of Moratorium 2.0, or Moratorium 1.0?
Technically, the Moratorium 2.0 is applicable only for loans which were standard as on 1st March, 2020. Hence, it does not apply on new loans.

10. Is the moratorium on principal or interest or both?
As in case of Moratorium 1.0, the Moratorium 2.0 is also applicable on both interest and principal. Therefore, the repayment schedule and all subsequent due dates, as also the tenure, for loans may be shifted by three more months. Instalments will include payments falling due from March 1, 2020 to August 31, 2020 in the form of-
(i) principal and/or interest components;
(ii) bullet repayments;
(iii) Equated Monthly instalments;
(iv) credit card dues.

11. During implementation of Moratorium 1.0, Lending Institutions have gone ahead and executed documentation with the borrowers, revising the repayment schedule. This also includes the repayment of the deferred instalments during the moratorium period. Now that Lending Institutions for an extension, there will be hassles of recomputing the repayment schedule. Lending Institutions may have actually gone ahead and taken PDCs, NACH instructions or similar commitments from borrowers. Is the approach of second-time extension practical?
Normally, regulators should not do micro-prudential management and should leave Lending Institutions to operationalize their relationship with the borrowers themselves. Therefore, ideally, RBI ought to have used a permissive approach rather than hand-holding.
The effort of reaching out to a massive borrower base for yet another round of loan restructurings is certainly not conducive. Additionally, Moratorium 1.0 was granted based on board-approved policies. Many policies may have been specific to Moratorium 1.0 only. Therefore, reaching out to the board of directors once again, and getting policies amended, etc., will be quite an effort, not very productive either.
However, it may be contended that the reach of the COVID disruption and its extended impact on the economy was not assessable at the time when Moratorium 1.0 was announced.

12. Can Lending Institutions grant extensions for loans where the last EMI falls due after August 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 August 31, 2020. However, considering the disruption caused across the globe, the Lending Institution may consider extension of the EMI dates for installments falling due after August 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.

13. Will the Moratorium be applicable to instalments which had fallen due before March 1, 2020 but were not paid on that date?

On this issue, we have had a detailed discussion in our earlier version of the FAQs.

As per the contents of a certain letter dated March 31, 2020 written by RBI to IBA, it is stated that 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, we had opined that such an interpretation would 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 August 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 have been multiple rulings on this issue – Delhi High court in Anantraj Limited vs Yes Bank order dated 6th April, 2020[1] and Transcon Skycity Private Ltd v. ICICI Bank and Transcon Iconica Private Ltd v. ICICI Bank[2]. Subsequently the RBI vide notification dated April 17, 2020[3] affirmed the view taken by us above.

Hence, Moratorium 2.0 will also apply with equal force to payments which were due but not paid on 1st March 2020, as long as the facility was standard.

14. How will the moratorium impact the existing loan tenure?
In case the extended moratorium is granted, the residual tenure will also be extended.
There are several ways of dealing with the moratorium, and Lending Institutions may have to take a considered call on how to recover the missing instalments and the interest thereon. Now that the tenure has gone up from 3 months to 6 months, the question becomes all the more significant. The different ways of dealing with the moratorium may be:
• Recompute the EMIs on the “accreted principal outstanding” (meaning, the Principal Outstanding as increased by the interest during the Moratorium period), keeping the residual tenure the same.
• Recompute the tenure, for recovering the accreted principal outstanding keeping the EMIs the same.
• Recover the EMIs during the moratorium period, along with interest thereon, by way of a bullet repayment at the end of the term.
• Recover the EMIs during the moratorium period, along with interest thereon, by converting the same into N number of instalments.

15. 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.

16. Will there be delayed payment charges for the missing instalments during the moratorium period or extended 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.

17. Which all loans shall be considered eligible for Moratorium 2.0?
All standard term loans as on March 1, 2020 are eligible to claim the relaxation. In our view, the benefit of extended moratorium cannot be limited to borrowers who have opted for Moratorium 1.0. That does not sound either reasonable or logical. The borrower may have thought of not availing the earlier moratorium, thinking he will still be able to manage the cashflows. However, the extended impact of the moratorium may force the borrower to rethink.

18. Is the extended moratorium applicable to the following:

(a) Personal loans of small maturities
Sometimes personal loans are granted with small maturities – say 3 months or so. Moratorium 2.0 along with the earlier version itself extends to 6 months. Therefore, Lending Institutions may have to take a call on extending the facility.

(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. However, these facilities may be very short term in nature – therefore, Lending Institution may have to take a call about extended benefit of Moratorium 2.0.

(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.
As opined earlier, moratorium is not applicable to such facilities. 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.

19. 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.

20. 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

21. Is it possible for the Lender to not provide the extension of the moratorium?
Moratorium 2.0, along with Moratorium 1.0 take the total holiday to as long as 6 months. Lending Institutions will have to take a call on the impact of the moratorium on the borrower base, after carefully analysing the disruption in the revenues of their borrowers. We strongly suggest that the Lending Institutions may not follow a bandwagon approach.

22. 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, or different extensions of the moratorium, 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.

23. 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.

24. Can the moratorium period be different for different loans of the same type? For example, a lender grants a moratorium of 6 months for all loans which are 60-89 DPD, and a moratorium of 4 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.

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

26. 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.

27. 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.

28. 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 August, in case of a 6 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 extension of moratorium

29. What are the actionables required to be taken by the lending institution to grant the extension of the moratorium?
Moratorium 1.0 provided for a board-approved policy for granting the moratorium. The policy was also to be put up on public domain. Most Lending Institutions have framed specific policies, constructed keeping in view Moratorium 1.0. Hence, in all likelihood, they will be required to put in place yet another policy, or amendment to the existing policy, to grant Moratorium 2.0.
In our view, any Policy should provide maximum facility to the concerned authority centre in the hierarchy of decision-making so that everything does not become rigid.
Kindly refer to the list of actionables here for Moratorium 1.0. The same may be read mutatis mutandis for Moratorium 2.0.

30. In case the lender intends to extend Moratorium 2.0, will it require consent of the borrower and confirmation on the revised repayment schedule once again?
Any restructuring or loan modification is a base of debtor-creditor contract. Hence, the revised terms must be communicated to the borrower and the acceptance must be recorded. Lenders may resort to technology for getting e-signatures to the contract.
Further, the PDCs or NACH should not be presented for encashment as per the existing terms. Revised mandates will be needed from the borrowers too.

31. In case of Moratorium 2.0 is the lender required to obtain fresh PDCs and NACH debit mandates from the borrowers?
This seems natural.

NPA Classification and Restructuring

32. What will be the impact of Moratorium 2.0 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, that is, SMA 0, SMA 1 or SMA 2, there will be a stand-still on asset classification during the period of the moratorium. There have been several flip-flops on this, but our view, originally expressed, has finally been accepted.
32A. Effectively, are we saying the grant of the moratorium is also a stoppage of NPA classification?
Yes, there will be a standstill on NPA classification during the period of the moratorium. This would mean the time clock has stopped running during the moratorium.

33. If a loan was granted the benefit of Moratorium 1.0, but has not been granted benefit of Moratorium 2.0, what will happen to the NPA classification if there are no EMIs during the period from 1st June to 31st August?
Clearly, if there was no moratorium, there is no question of stopping the deterioration of the account. Hence, if there are no payments made by the borrower, or less than scheduled payments are made, the account may deteriorate into an NPA status.
Additionally, also note that a payment made by a borrower is usually taken on FIFO basis. That is, any payment made during June – August will first be taken to credit of what was due as on 1st March 2020.
General Loss Provisioning Requirements

34. Para 5 of the RBI Notification dated April 17, 2020 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.

35. 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.

36. What about the quarter of 30th June, 2020?

For those lenders who have extended the benefit by way of Moratorium 2.0, there will be standstill in the NPA clock even on 30th June, 2020:

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?
0 31 No question
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 (without considering standstill) Explanation Whether 5% general loss provision in the Q4, 2020 required?
0 121 During the moratorium, from 1st March to 31st May, customer paid nothing. In the month of June  as well, the customer pays nothing taking advantage of the extended moratorium. There was no payment obligation during the moratorium since there was a loan modification. There was no default on 1st March. Hence, the account is completely in order – the 121 DPD is actually the obligations during moratorium, which has been deferred. No provisioning at all
30 151 The customer did not clear his default of 30 days which was past due on 1st March. From 1st June to 30th June, the customer is taking benefit of Moratorium 2.0. Therefore, no payment is made in the month of June as well. The 30 days’ default has remained in stand-still mode due to the moratorium. Hence, the account has been benefited by the stand-still. Hence, this account will require 5% provisioning in the quarter of 30th June.
60 181 The customer had an obligation to pay for 2 months as on 1st March. Therefore, obligation as on 1st March achieves a vintage of 181 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.

37. 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.

38. 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.

39. 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.

40. 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.

41. 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.

Impact of moratorium on corporate borrowers

42. What will be the impact of Moratorium 2.0 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?
We have given this answer in context of Moratorium 1.0, and our answer will hold the same for Moratorium 2.0 as well. Answer should be in the negative, for the following reasons:
1. Section 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.

43. 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 Moratorium 2.0 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

44. 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.
Additionally, there has been a clarification from IFRS Board which states that “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”[7] (SICR stands for significant increase in credit risk).”

45. 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.

46. 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.

47. 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.

48. 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.

49. 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

50. During Moratorium 1.0, there have been extensive discussions with stakeholders in securitisation industry about the need for PTC holders’ consent for giving effect to the moratorium. While in most cases, the benefit of the moratorium was ultimately reflected on the cashflow waterfall of securitisation transactions, there have been several rounds of debates on the issue. What is the position with Moratorium 2.0? What if PTC holders refuse to give sanction to yet another round of moratorium?
Our view on this is the same as it was during Moratorium 1.0. Yes, the concurrence of the PTC Holders is required. A lender cannot distinguish between teh loans which have been securitised/assigned, and those that have not been, and no lender can put a borrower to prejudice for that reason. Hence, lenders will have to pass the benefit to all borrowers across board, without distinguishing between those on the books, and those who have been sold. However, if the PTC holders do not give their consent to mirroring the modified cashflows on the waterfall, the trustees will be forced to use the credit enhancements to make the missing payments. This may cause erosion of the credit enhancement available, which may result into the securities being downgraded.
On the other hand, if the PTC holders give concurrence to the modified waterfall, there is no default, and the waterfall structure of the PTCs matches that of the underlying loans.
Also there have been rigorous debate on whether such a restructuring amounts to a default in case of mutual funds – that issue was also settled with a SEBI circular one for MFs and one for rating agencies separately.

51. 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 to August. Is the trustee bound to use the credit enhancements (excess spread, over-collateralisation, cash collateral or subordination) to recover these amounts?
In our view, yes.

Impact in case of direct assignment transactions

52. 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.

53. 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

54. In case of a co-lending arrangement, can the co-lenders grant differential benefit of the extension 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] W.P.(C) URGENT 5/2020

[2] Writ Petition LD-VC No. 28 & 30 of 2020 in the High Court of Judicature at Bombay.

[3]https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11872&Mode=0

5 replies
  1. prahladka Op
    prahladka Op says:

    You are not discussing on application of Moratorium No1 & 2 benifit to be extended to borrowers having working capital of nature Preshipment & Post Shipment’s and Interest accured there on from 1st March 2020
    Earlier COVID 19 March end circular of RBI unfortunatately restricted defferement of Interest payment on OD/CC working capital limit only
    And even after writing to them RBI did not issue required clarification for inclusion of Preshipment & Postshipment in the meaning of working capital which could have helped Exporter’s Community

    Reply
  2. Anita Baid
    Anita Baid says:

    Reply to a, b and c:
    Our view remains the same for both Morat 1.0 and Morat 2.0. Going by the language of the notification, it seems that new loans are not covered. However, since the RBI has permitted banks and NBFCs to grant the relaxation for loans classified as standard on March 1, 2020 due to the disruption, it will be counter intuitive to say that the new loans disbursed during this period shall not be eligible for the benefit. Hence, in our view, the NBFCs/banks may at its own discretion extend the benefit to the loan installments of new loan accounts falling due during the first and second phase of Moratorium.

    Reply to d:
    The 10% provision may only be applicable where, in the absence of granting moratorium, the account would have become NPA. That would be the case if those accounts were SMA2 on 1st March, 2020. Hence, the provisioning may not be required for new loans.

    Reply to e:
    The asset classification of a loan account is downgraded on restructuring. However, extending the moratorium relaxation to the entire class of borrowers due to the disruption may not be regarded as restructuring and hence, the asset classification on such new loans shall be based on the revised terms of repayment.

    Reply
  3. Shakil
    Shakil says:

    FAQ no.6 dated March 27, 2020 on M1 – you have opined that “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 installments of such new loans are falling due between March 1, 2020 and May 31, 2020.”

    FAQ no.9 dated May 22, 2020 on M2 – you have opined that “Technically, the Moratorium 2.0 is applicable only for loans which were standard as on 1st March, 2020. Hence, it does not apply on new loans.”

    Would be grateful to have your views on the following clarification basis the RBI circulars / FAQs –

    a. The reasons if any, for difference in views taken in M1 and M2 with regard to new loans.
    b. You have said “technically” moratorium is not available. Is there any other interpretation available in your views.
    c. Whether NBFCs are permitted to grant moratorium to loans sanctioned on or after 1st March 2020.
    d. What would be your views with regard to provisioning with regard to such loans as they were not in existence as on 29th February, the date being referred to RBI circulars
    e. whether such accounts will be eligible for the relaxation granted by RBI for the purpose of asset classification as standard assets under IRAC norms.

    This is a practical issue faced by many banks/NBFCs particularly on loans sanctioned between 1st March to 27th March – prior to RBI announcement and also with regard to incremental loans sanctioned even after that date.

    Reply
    • Staff Publication
      Staff Publication says:

      The essential principle is – a restructured loan is a sub-standard loan if the restructuring has been done in view of a credit weakness of the borrower. In the present case, the loan was sanctioned after 1st March, and surely such borrower will have been impacted by the COVID disruption as much as any other borrower. If the benefit of the moratorium is granted to a borrower who was onboarded after 1st March, it cannot be argued that the restructuring is done to avoid a credit weakness.
      One may get support from the definition of “restructuring” as cited in answer to Q 12 above. Also, kindly note that the RBI has repetitively used the terms – “and the changes in the credit terms permitted to the borrowers to specifically tide over economic fallout from COVID-19 in terms of paragraph 4 above, will not be treated as concessions granted due to financial difficulty of the borrower” [https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11902&Mode=0].
      You may not be able to get a direct regulatory answer to the question, but the principle that the loan modification here is not specific to a borrower, but to all borrowers onboarded on or after 1st March upto the commencement of the disruption, should assist.

      Reply

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