Archive for month: August, 2020
Corporate Governance & material price sensitive information – Need for listed entities to frame effective materiality policy
– Vinita Nair, Senior Partner | Shaivi Bhamaria, Associate Legal Advisor | corplaw@vinodkothari.com
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Open in new tab Additional relief from COVID-19 disruptions
Based on the recommendations of the Monetary Policy Committee
-Financial Services Division (finserv@vinodkothari.com)
Extension of the restructuring norms for MSME debt
The RBI via a notification on 1st January 2019[1] had allowed NBFCs and banks to restructure their advances to MSMEs, classified as ‘standard’, without any asset classification downgrade and the same was extended further on 11th February 2020.[2]
Through the notification dated August 6, 2020[3], the RBI has again extended the timeline for restructuring till March 31, 2021.
Further, the notification dated August 6, 2020 provides that the accounts which may have slipped into NPA category between March 2, 2020 and date of implementation i.e. from August 6, 2020 to March 31, 2021, may be upgraded as ‘standard asset’, as on the date of implementation of the restructuring plan.
For accounts restructured under these guidelines, the lenders are required to maintain an additional provision of 5% over and above the provision already held by them with respect to standard assets. Though, the extension notification does not specifically provide such provisioning requirements for NBFCs, however, reading in consonance with the January 2019 notification, it can be said that the requirement is for both banks and NBFCs.
The extension of relaxation would chiefly benefit the MSME borrowers who are having sound businesses as well as repayment capabilities however, are unable to meet their obligations post 1st March 2020, due to widespread disruption caused by the pandemic. The move would ensure that MSMEs that are having a viable business standing are not hit by negative classification just because of short term volatilities.
Advances against Gold Ornaments and Jewellery
The existing RBI guidelines[4] require that for the loan granted by banks against the security of gold jewelry i.e. gold loans a Loan-to-Value (LTV) Ratio of maximum upto 75% has to be maintained. Through notification dated August 6, 2020[5], LTV requirement has been relaxed temporarily. Accordingly, banks may now lend up to 90% of the amount of gold jewellery pledged until March 31, 2021.
Banks may, while sanctioning new loans, grant relatively more amount of loan. Further, using the advantage of extended LTV, banks may also consider providing top-up loans to the existing borrowers, on existing security of gold jewellery.
After March 31, 2021, the LTV requirement shall be restored back to 75%. While the notification mentions that fresh loans granted after such date shall have an LTV of 75%, it is silent about the treatment of existing loans. Clarification in this regard is expected from the RBI.
In the absence of any clarification, the loans given before March 31, 2021 shall also be bound by the LTV of 75% after such date. Accordingly, the banks should either structure the loan in such a manner that the LTV comes down to 75% after receiving repayments up to March 31, 2021 or the banks may have to call back a certain portion of loan so as to meet the LTV requirement after such date.
It may also be noted that despite the high amount of market penetration of NBFCs in gold loan sector[6], no such relaxation has been provided to NBFCs.
Priority Sector Lending by Banks
The RBI has revised the existing guidelines on priority sector lending (PSL) by banks[7]. While the detailed PSL guidelines are yet to be released, following are a few major changes that will be introduced:
- Start-ups would be a new sector to come under the ambit of priority sectors
- The limits for renewable energy, including solar power and compressed bio-gas plants, small and marginal farmers and weaker sections are proposed to be increased.
- An incentive-based system shall be introduced, which shall address the regional disparities in the flow of priority sector credit. Under this system, higher weight will be assigned for incremental priority sector credit in the identified districts where credit flow is comparatively lower and vice versa.
[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11445&Mode=0
[2] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11808&Mode=0
[3] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11942&Mode=0
[4] https://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=9124 and https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=8701&Mode=0
[5] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11944&Mode=0
[6] https://assets.kpmg/content/dam/kpmg/in/pdf/2020/01/return-of-gold-financiers-in-organised-lending-market.pdf
[7] https://m.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10497
ECLGS scope expanded to cover business loan by individuals
-Financial Services Division (finserv@vinodkothari.com)
The Finance Minister had announced several measures to provide stimulus to economy for providing a momentum after impact caused by Covid-19 and also to take further the mission of self-reliant India. Among various schemes introduced in the package, one was the Emergency Credit Line Guarantee Scheme (‘Scheme’), which intends to enable the flow of funds to MSMEs by providing additional loans to MSME’s covered by 100% government guarantee.
Under this Scheme, the Government of India, through a National Credit Guarantee Trust (NCGTC), will provide 100% guarantee on loans provided by banks and Financial Institutions (FIs) to MSMEs and MUDRA borrowers under the said scheme. The Scheme aims to extend additional funding of Rs. 3 lakh crores to eligible borrowers in order to help them through the liquidity crunch faced by them due to the Covid-19 crisis.
In order to ensure the full utilisation of the 100% government guarantee loans in times of such financial downturns, the scheme has been updated on July 4, 2020[1] to widen the scope and significant changes in the limits has been notified. It is evident form the amendments under revised operational guidelines that it is aimed at providing deeper benefit to the society, by expanding the borrower base to include individuals who have availed loan for business purposes under the scheme.
National Credit Guarantee Trust by a Notification date 31st October 2020 has extended the scheme up to 30th November 2020 or till the utilisation of 3 lakh crores, whichever is earlier.
This article discusses the changes and its impacts in detail.
Key changes under the new ECLGS
Eligible Borrower
The erstwhile operational guidelines only allowed Business Enterprises/MSME to borrow under the scheme which were having already existing loan facility with the member lending institution (MLI). The major change under the revised guideline is the extension of the scheme to the individuals who have existing loan facility with MLI. Such application of credit facility by an individual under the scheme shall be supported by Management Certificate to the effect that they have availed such loan facility for their own business purposes.
We had earlier also held the view that a loan taken by a business, even though owned by an individual and not having a distinctive name than the individual himself, cannot be regarded as a “loan provided in individual capacity”. And hence, must be covered under the ambit of the scheme.
For instance, many SRTOs, local area retail shops etc are run in the name of the proprietor. There is no reason to disregard or disqualify such businesses. It is purpose and usage of the loan for business purposes that matters.
The scheme now specifically includes individuals who have availed loans for business purpose, this would help business who are not incorporated or the owner had availed facility in its own name. This would also benefit professionals like Doctors, CA/CS/CMA, who have availed loans for scaling up their service businesses.
Increase in total outstanding loan limit for eligible borrowers
Under the previous operational guideline the total outstanding loan limit of an eligible borrower from all the MLI was caped at INR 25 crores which has now been increased up to INR 50 crores as on February 29, 2020. As the ceiling for maximum amount of loan is increased the maximum amount of guaranteed loan that can be issued under the guideline have increased from INR 5 crores to INR 10 crores.
Increase in turnover limit for eligible borrowers
The turnover limit of eligible borrowers has been increased from INR 100 Crores to INR 250 crores. This means eligible borrowers which were earlier having annual turnover inclusive of all taxes/GST more than INR 100 crores are now eligible under the new operational guidelines. Provided there annual turnover is less than INR 250 crores for financial year 2019-20.
Smaller companies were already covered under the scheme and so the aforesaid amendment would include larger companies as well.
Option to MLI providing ECLGS facility on behalf of other lenders
The erstwhile operational guideline provided for a borrower who wishes to take from any lender more than 20% of outstanding credit that the borrower had with specific lender, a NOC would be required from all the other lenders.
Revised operational guidelines has served as a clarification that NOC to be required in such cases only from the lender whose share of ECLGS loan is proposed to be extended by a specific lender. However, it would be necessary for the specific lender to agree to provide ECLGS facility on behalf of such of the lenders.
Conclusion
As per the news report, more than half of the amount of guarantee approved under the scheme remains unrealised till date. Hence, the increase in ambit of scheme would be beneficial to reach out to the businesses in the name of individuals as well. Further, it would help the larger businesses to avail funding, in these times when all businesses are facing liquidity issues.
[1] https://www.eclgs.com/documents/Operational_Guidelines_ECLGS_Updated_as_on_August_04_2020.pdf
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