Regulator’s move to repair the NBFC sector

-Mridula Tripathi


The evolving impact on people’s health has casted a threat on their livelihoods, the businesses in which they work, the wider economy, and therefore the financial system. The outbreak of this pandemic is nothing like the crisis faced by the economies in the year 2007-08 and imperils the stability of the financial system. The market conditions have forced traders to take aggressive steps exposing the system to great volatility thereby resulting in crashing asset values. Combating the pandemic and safeguarding the economy, the financial sectors across the globe have witnessed numerous reforms to hammer the aftermaths of the global crisis. Read more

Restructuring of bonds during COVID-19 crisis

This presentation covers the procedural requirements for restructuring of bonds/debentures during COVID-19 crisis.

Please click below for the presentation:


Please click here for the PPT used in the presentation.


The Rise of Stablecoins amidst Instability

-Megha Mittal


The past few years have witnessed an array of technological developments and innovations, especially in Fintech; and while the world focused on Bitcoins and other cryptos, a new entrant ‘Stablecoin’ slowly crept its way into the limelight. With the primary motive of shielding its users from the high volatility associated with cryptos, and promises of boosting cross-border payments and remittance, ‘Stablecoins’ emerged in 2018, and now have become the focal point of discussion of several international bodies including the Financial Standards Board (FSB), G20, Financial Action Task Force (FATF) and International Organization of Securities Commission (IOSCO).

Additionally, the widespread notion that the desperate need of cross-border payments and remittances during the ongoing COVID-crisis may prove to be a defining moment for stablecoins, has drawn all the more attention towards the need of establishing regulations and legal framework pertaining to Stablecoins.

In this article, we shall have an insight as to what Stablecoins, (Global Stable Coinss) are, its modality, its current status of acceptance by the international bodies, and how the ongoing COVID crisis, may act as a catalyst for its rise.

Read more

Australia’s unique Structured Finance Support Fund (SFSF)

– A $15 billion stimulus package for securitisation transactions

Timothy Lopes, Executive, Vinod Kothari Consultants


COVID-19 has pushed the global economy into recession. Many countries have made several policy reforms to address and mitigate the impact of the pandemic. Several countries have provided ‘moratorium’, ‘loan modification’ or ‘forbearance’ on scheduled loan obligations of borrowers.

There is no doubt that this deferment of payment by borrowers of principal and interest cause by moratorium in several countries, will have an impact on the cash flows in securitisation transactions.

Australia is one of the major economies that has provided relief to borrowers in the form of a six month moratorium for small business. Due to the relief provided, the country has also recognized the need for providing support to securitisation transactions which will be affected by the moratorium and has enacted a new legislation, thereby constituting a fund for structured finance.

In this write up we discuss the details of this seemingly new and innovative support mechanism for securitisation transactions.

Moratorium on loans in Australia

The Australian Banking Association (ABA)[1] has provided a moratorium package which extends to all small business loans as well as mortgages. There will be deferment of principal as well as interest for a period of six months. Interest will continue to be accrued, 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.

In order to be eligible for the same, one must have less than $10 million total debt to all credit providers and needs to be current, and not in arrears as of 1 January 2020.

The Australian Structured Finance Support Fund (SFSF)

On 24th March, 2020, Australia enacted a new law called the Structured Finance Support (Coronavirus Economic Response Package) Act 2020[2] (‘Act’). The Act was supported with the Structured Finance Support (Coronavirus Economic Response Package) Rules 2020[3] (‘Rules’) as well as the Structured Finance Support (Coronavirus Economic Response Package) (Delegation) Direction 2020[4] (‘Delegation’).

The move was part of an announcement made by the Australian Government in this regard to provide continued access to funding markets for small and medium enterprises (SMEs) impacted by the economic effects of the Coronavirus, and to mitigate impacts on competition in consumer and business lending markets.

Pursuant to the Act, a Structured Finance Support Fund has been established with an initial corpus of A$15 billion. The said fund is managed by the Australian Office of Financial Management (AOFM)[5].

Purpose of the Fund

The fund is set up with the purpose of making investment in RMBS, ABS and warehousing facilities to compensate for cashflows deferred as a result of COVID-19 hardship payment holidays being granted to borrowers.

The idea is to invest in securities issued by SPVs who wish to be compensated for the missed interest component of scheduled payments not received from the borrower as a result of the payment holiday granted due to the impact of COVID-19.

This will provide a source of liquidity to securitisation transactions to mitigate the impact of non-payment of interest on account of the moratorium.

Inner mechanics of the fund

Eligible lenders who can access the fund are the following –

  1. A non-ADI lender, (regardless of size); or
  2. An ADI (Authorised Deposit-taking Institution) that does not have the capacity to provide the collateral that is acceptable to the Reserve Bank of Australia (RBA) under a term funding facility (and is not a subsidiary of another ADI that does have access to such a facility).

Authorised Debt Securities –

As per the Act, the fund is permitted to invest in only in ‘authorised debt securities’. As per Section 12 of the Act, –

An authorised debt security is a debt security that:

  • is issued by:
  • a trustee of a trust; or
  • a body corporate that is a special purpose vehicle; and
  • is expressed in Australian dollars; and
  • relates to one or more amounts of credit; and
  • complies with the requirements or restrictions (if any) prescribed by the rules.

The Rules go on to prescribe that for the purpose of Section 12, an authorised debt security must not be a first loss security.

Thus, we are looking at investments made by the fund in the senior most securities issued by an SPV or other securities, which must not be a first loss security.

Investment priority/ decision making –

The Delegation issued, sets out the investment strategies/policies, decision-making criteria and appetite for risk and return for the SFSF. These are designed to assist the fund to prioritise between investments.

As per the Delegation, priority must be given to investments which provide support to smaller lenders.

Setting up a “Forbearance” SPV

The Australian Securitisation Forum (ASF) and AOFM are developing a structure that will enable the SFSF to invest in new senior ranking debt securities issued by a newly constituted “Forbearance” SPV.

That SPV will then advance funds to securitisation trusts and warehouses who wish to draw liquidity advances to compensate for the missed interest component of scheduled payments not received as a result of the borrower being granted a payment holiday or moratorium due to the impact of COVID-19.

The plan of the ASF is to appoint legal counsel to develop a detailed term sheet to describe how an industry wide “Forbearance” SPV can operate subject to the terms of the SFSF legislation and the operational guidelines of the SFSF.  Once established eligible issuers and lenders can be registered to access the “Forbearance” SPV.  It is expected that eligible participants will need to subscribe for junior notes in the “Forbearance” SPV in proportion to their participation and these notes will not cross collateralise the obligations of the other participants.

The ASF expects that the “Forbearance” SPV will appoint an independent party to verify the transfer of eligible COVID-19 receivables to the SPV and reconcile drawdowns and repayments under the liquidity facility, amongst other things.

This is an innovative structure which would identify lenders in need, particularly small lenders and provide the required liquidity by advancing funds to compensate for the impact of the moratorium.


The structured finance industry world over is seen to impacted by payment holidays provided. While in most cases, there would have to be modification in the pay-outs of the securitisation transaction, Australia has recognised the need to support securitisation structures by setting up a Fund with a seemingly large corpus to deal with the issue of moratorium.

So far, the SFSF has announced two investments to date, the first in Firstmac’s 2019-1 RMBS and the second in a Judo Bank warehouse facility. This move along with several other policy measures taken by the Reserve Bank of Australia can only help mitigate the impact of COVID-19 on securitisation structures.






Asset classification standstill and other liquidity support measures- RBI Governor’s Statement of 17th April, 2020

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[1] 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[2] 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.

Liquidity Measures

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[3] 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[4] 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[5], 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.

Refinancing Facilities

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.

Regulatory Measures

Asset Classification

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[6] 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:

  1. Dues payable between 1st March, 2020 and 31st May, 2020
  2. Dues payable before 1st March that are classified as standard as on 1st March
  3. 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.

Provisioning requirement

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?
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 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”[7] (SICR stands for significant increase in credit risk).”

There have been similar statements from the Basel Committee of Banking Supervision[8] (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[9]. 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[10], once an account defaults, a Review Period[11] 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[12] 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.











[11] 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.


The Great Lockdown: Standstill on asset classification

– 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[1], several countries have taken measures to try and provide stimulus packages to mitigate the impact of COVID-19[2]. 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[3] 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.[4]

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[5]

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.

Read more

Moratorium on asset classification of past due accounts

– Anita Baid,

(Updated as on 24.04.2020)


Due to sudden out-break and spread of COVID-19 across the globe, economic condition of the financial service sector has been adversely affected. In this regard RBI has issued several guidelines and advisories and brought into place regulatory polices to give benefit to the borrowers to ease the financial crisis. The Reserve Bank of India in its Statement of Development and Regulatory Policies dated March 27, 2020[1] has permitted banks and non-banking financial institutions to provide a moratorium to borrowers for a period of 3 months. Thereafter, the RBI came up with a notification titled COVID 19 Regulatory Package[2] providing a brief guideline about the relaxation. This was followed by the FAQs on RBI’s scheme for a 3-month moratorium on loan repayment[3] issued by the Ministry of Finance.

However, there are still certain issues that are not clear and due to the ambiguity around such issues, banks and NBFCs have been making their own interpretation[4]. One such major issue was with respect to the grant of moratorium to loan accounts having over dues as on March 1, 2020.

Regulatory Package by RBI

Before examining the issue let us understand that the underlying objective of the RBI’s guidelines was to inter-alia ease the financial stress caused by COVID-19 disruptions by relaxing repayment pressures and improving access to working capital. The COVID -19 Regulatory Package provides for rescheduling of the payments in respect of term loans and working capital facilities.

Several contentions have been raised stating that the moratorium is not applicable to the borrowers who are already in default as on March 1, 2020. The argument to support this contention is that the language of the Regulatory Package clearly states that the three month moratorium is applicable only to those instalments which fall due between March 1, 2020 and May 31, 2020. Accordingly, only those borrowers would be covered whose loan account is outstanding as on March 1, 2020 and were properly servicing their account till that date and were not in default.

This was further supported by a clarification issued by letter dated March 31, 2020 by the Chief General Manager-in-charge, Department of Regulation of the RBI to the Chairman, Indian Banks Association, wherein it stated that if a borrower has been in default even before March 1, 2020, such default cannot be said to be as a result of economic fall due pandemic and benefit of moratorium can be extended to such borrower in respect of payment falling due during the period March 1, 2020 to May 31, 2020. However, payments overdue on or before February 29, 2020 will attract the current Income Recognition and Asset Classification Guidelines (IRAC Guidelines)[5].

Such an approach will cause all past due accounts to become NPAs during the disruption period, and therefore, the regulatory recognition of the disruption period as not a case of contractual failure but a case of systemic failure, gets defeated. The relaxation or grant of moratorium presumes that during the period of March 1, 2020 to May 31, 2020, the borrower has not paid due to a systemic disruption. If the logic of disruption applies to the current dues during the moratorium period, the same logic cannot be inapplicable for the past dues.

For example, a borrower had payments due on February 29, 2020 which was 30 DPD. In case he cleared all his dues, say on 31st March, his account, which was, say, 60 DPD on 29th March, would have been a regular standard account. But the borrower was precluded from paying anything during the disruption period. Thus, the opportunity of clearing any past due payment is not available to the borrower during the period of disruption. What is a “default” on 1st March, 2020 continues to be a default, but the ageing of the default cannot increase during the disrupted period. The disruption is not a credit event, perhaps, it is an externality, and admittedly a force majeure. Therefore, the disruption causes a standstill on the obligations of the borrower.

The period of disruption is a period during which the clock of the payments in the system stops. If the ageing of past receivables changes, then the disruption will cause all regular accounts to become irregular. In such a case even a 10 DPD on February 29, 2020 will become an NPA around May 19, 2020. Such an approach will cause all past due accounts to become NPAs during the disruption period, and therefore, the regulatory recognition of the disruption period as not a case of contractual failure but a case of systemic failure, gets defeated.

Delhi High Court Ruling

The recent judgement of the Hon’ble Delhi High Court in the case of Anant Raj Limited Vs. Yes Bank Limited dated April 6, 2020[6] has given a different perspective to the entire situation.

The matter of dispute was the asset classification of the petitioner. The petitioner’s instalment that was due on 01.01.2020 was not paid within 30 days, due to which the account was classified as SMA-1 and thereafter since it was not paid within 60 days, the account was classified as SMA-2. Further, it was contended that since the instalment was not paid till 31.03.2020, the account of the petitioner was liable to be classified as NPA.

The court considered the fact that in view of the pandemic COVID-19, RBI has issued several guidelines and advisories and brought into place regulatory polices to give benefit to the borrowers to ease the financial crisis. The intention of the RBI is to maintain status quo as on March 1, 2020 with regard to all the instalments payment which had to be made post March 1, 2020 till May 31, 2020. Further, the relevant provision of the Regulatory Package with respect to classification of accounts also indicates that the intention of RBI is to maintain status quo with regard to the classification of accounts of the borrowers as they existed as on 01.03.2020. The relevant extract of the judgement is as follows:

  1. The restriction on change in classification as mentioned in the Regulatory Package shows that RBI has stipulated that the account which has been classified as SMA-2 cannot further be classified as a non-performing asset in case the instalment is not paid during the moratorium period i.e. between 01.03.2020 and 31.05.2020 and status quo qua the classification as SMA-2 shall have to be maintained.

This implies that for a period of three months there will be a moratorium from payment of the instalment. However, interest shall continue to accrue on the outstanding payment even during the moratorium period. Further, in case the borrower fails to pay the said instalment after the expiry of moratorium, the asset classification would change as per the IRAC Guidelines.

Bombay High Court Ruling

The Bombay HC has also taken a similar view on the issue of asset classification during moratorium. In the case of ICICI Bank against two real estate companies, namely Transcon Skycity Pvt. Ltd. and Transcon Iconica Pvt. Ltd.[7], the HC has directed ICICI Bank to exclude the period of moratorium amid coronavirus lockdown while computing 90 days for declaration of non-performing assets.

As per the facts of the case, the petitioner companies had availed finance facilities from ICICI Bank, which were to be repaid in instalments, but they failed in repaying two instalments. As per RBI norms, for classification of accounts as NPA, the 90-days period would end during the current lockdown period. The plea of the petitioners was to restrain ICICI Bank from taking any coercive actions against them and sought the court’s declaration that they were entitled to benefits under the RBI’s relief packages permitting lending institutions to allow a three month moratorium on all loan repayments.

It was contented by the petitioners that if the moratorium period is not excluded from the NPA declaration period, the moratorium itself would be meaningless in situations such as those of petitioners. The HC also drew reference to the Delhi HC ruling discussed above, which concluded that the purpose of the moratorium and the entire rationale would be nullified if moratorium isn’t extended for accounts outstanding as on March 1, 2020.

The HC held that the moratorium period of March 1 till May 31, 2020 during which there is a lockdown will stand excluded from the NPA declaration computation until the lockdown is lifted. It further clarified that the relief is co-terminus with the lockdown period and not the declared end of the moratorium. The exclusion from the 90-day NPA-declaration timer and countdown can only therefore operate during the lockdown period and will end upon the complete lifting of the lockdown.

However, the concluding remarks of the order makes this a case specific decision. The HC cautioned that this order will not serve as a precedent for any other case in regard to any other borrower who is in default or any other bank and that each of these cases will have to be assessed on their own merits.

Another Ruling by Delhi HC

The Delhi HC has again addressed the issue of applicability of the moratorium period in the classification of an asset as an NPA. In the case of Shakuntala Educational & Welfare Society v Punjab & Sind Bank[8] the petitioner was a charitable society engaged in the business of technical and higher education which had sought the benefit of the moratorium period for loans that were due on December 31, 2019, and were payable until March 31, 2020.

The petitioner has been diligently making repayments in accordance with the restructured plan of it remaining two terms loan but before the instalments payable in March, 2020, could be paid, the pandemic COVID had set in and consequently the RBI permitted grant of three month moratorium, vide its circular dated March 27, 2020, in respect of all term loans as outstanding on March 1, 2020. The petitioner was liable to make payment of quarterly instalments, and the default qua instalments in respect whereof the respondent is proposing to declare the petitioner’s accounts as NPA had fallen due on 31.12.2019. However, the petitioner expressed its inability to pay as several of its schools run in Uttar Pradesh (UP) were affected by the state government directive by which they could not insist on students making fee payments.

The HC considered the fact that the petitioner still had time to make the payment of the due instalments till March 31, 2020, before which date on account of the lockdown and directive issued by the State Government, it has been prevented from demanding the due fees from the students of its various institutes.

The HC concurred with the view taken in the ruling discussed above that the regulatory package intended to maintain status quo as on 1 March as far as classification of accounts is concerned. Accordingly, an interim relief was granted to petitioner by restraining the respondent bank from declaring the loans as an NPA until the next hearing. The Court, further, agreed to the proposal of the petitioner and added a caveat in this order stating that in case the directive of the UP government prohibiting fee collection is lifted before the next hearing, the petitioner would be liable to pay the pending dues within one week of such lifting.

Though the HC made reference and agreed to the view taken in the earlier ruling of Anant Raj Limited Vs. Yes Bank regarding maintaining status quo due to the moratorium period, however, the judgement was linked to a specific impact of the lockdown that is, the state government directive. In effect, it has delinked the asset degradation from both the lockdown and the moratorium period.


The first judgement of Delhi HC is in favor of extending the moratorium period to loans outstanding before March 1, 2020 by stating maintenance of status quo and justifying the same by a contextual reading of the RBI’s Regulatory Package, however, the orders in the other two cases are fact specific, one of which even reiterates that it cannot be treated as a precedent.

Deterioration to NPA status has manifold consequences, including provisioning requirement that have an impact of the P&L accounts. For NBFCs, their drawing power from banks comes down as NBFCs are not allowed to borrow against past due receivables. This will exacerbate the liquidity issue with NBFCs. Further, under the ECL provisions under IndAS 109, the continuation of default will cause the bucket of the receivables to move from Bucket 1 to Bucket 2, thereby requiring computation of lifetime expected losses. This may mean a huge impact on long-term receivables, as those in case of housing or project loans.

Post the HC judgement, two things have been clarified:

  1. An account already classified as NPA as on 29th Feb remains an NPA.
  2. An account that is not an NPA on 29th Feb and is just classified as SMA then the ageing of the receivable shall not change during the moratorium and any further asset degradation shall not happen.

Accordingly, the possible scenarios can be summarized as follows:

Existing Asset Classification Whether moratorium can be granted? Whether asset classification shall remain stand still?
Standard Asset Yes Yes
SMA-1 Yes Yes
SMA-2 Yes Yes

As per the practice adopted by banks and NBFCs, including HFCs, it seems that most of them have extended the moratorium on all standard loans, irrespective of whether they were overdue as on 1st March, 2020. Further, post the HC ruling, the asset classification of account which has been classified as SMA cannot further be classified as a non-performing asset in case the instalment is not paid during the moratorium period and status quo qua the classification as SMA shall have to be maintained. However, there is a possibility that the ruling may be challenged in a higher court, and the outcome of that ruling could be completely different. Therefore, until this ruling is challenged further or any clarification contrary to this issued by the RBI or any other authority, financial institutions may consider this ruling to frame their policy for account classification.

This article is further being updated in accordance with the RBI Governor’s address on April 17, 2020[9] and a subsequent notification[10] on the issue that has clarified the position once and for all. The RBI circular states that in respect of all accounts classified as standard as on February 29, 2020, even if overdue, the moratorium period, wherever granted, shall be excluded by the lender from the number of days past-due for the purpose of asset classification under the IRAC norms. Effectively the circular stalls the dip in the asset classification by 3 months. Further, 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.





[4] Our detailed FAQs on the subject can be viewed at

[5] In terms of the IRAC Guidelines, if an instalment is overdue by a period of 30 days, the borrower’s account is classified as Special Mention Account 1 (SMA-1) and if the instalment is overdue by 60 days, the account is classified as Special Mention Account 2 (SMA-2) and if the instalment is overdue by a period of 90 days, the account is classified as Non-performing Asset (NPA).

[6] W.P.(C) URGENT 5/2020


[8] W.P.(C)2959/2020



Global Securitisation – Are we heading into a coronavirus credit crisis?

Timothy Lopes, Executive, Vinod Kothari Consultants

The global financial credit crisis of 2007-08 was a result of severe financial distress arising out of high level of sub-prime mortgage lending. Top Credit Rating Agencies (CRA) downgraded majority securitization transactions, slashing ‘AAA’ ratings to ‘Junk’.

Sub-prime borrowers could not repay, lenders were weary of lending further, investors investments in Mortgage Backed Securities (MBS) were stagnant and not reaping any return.

All these factors led to one of the worst financial crisis that affected global economies and not just the US alone. Recovering from such a crisis takes ample amount of time and efforts in the form of policy measures and financial stimulus / bail out packages of the government.

The rapid spread and depth of Coronavirus (COVID-19) outbreak has had severe impact across the globe in a matter of months. Stock markets are witnessing a global sell off. Countries have imposed complete lockdowns countrywide in order to mitigate the impact of this pandemic. Securitisation volumes are likely to witness a drop in light of the pandemic.

Daily, the situation only seems to be getting worse due to the unprecedented outbreak of COVID-19 and its rapid spread. There is absolutely no doubt that the impact on the financial sector and on economies worldwide is / will be a negative one.

As stated by the RBI Governor, in his nationwide address on 27th March, 2020 –

“The outlook is now heavily contingent upon the intensity, spread and duration of the pandemic. There is a rising probability that large parts of the global economy will slip into recession”

The question here is, “Are we headed for another global financial crisis?” We try to analyse this question in this write up, in light of the present scenario.

Read more

Consensual restructuring of debt obligations, due to COVID disruption, not to be taken as default, clarifies SEBI

Vinod Kothari

The global economy, as also that of India, is passing through a systemic disruption due to the COVID crisis. The Reserve Bank of India in its Seventh Bi-monthly Monetary Policy Statement 2019-20 dated March 27, 2020[1] has permitted banks and non-banking financial institutions to provide a moratorium to borrowers for a period of 3 months.

As a result, cashflows of banks and financial institutions from underlying loans will be disrupted, at least for the period of the moratorium. It is a different thing that the disruption may actually prolong, but 3 months as of now is what is explicitly regarded by the RBI has COVID-driven.

Read more