The Reserve Bank of India (‘RBI’), through circular and press release dated March 27, 2020, has undertaken various developmental and regulatory measures that directly address stress in financial conditions in the country caused by COVID-19. The RBI Circular grants lenders the option to provide relaxations to borrowers on repayment of instalments under term loans and payment of interest under working capital loans. The instructions of the RBI have come into force with immediate effect. Here are some key takeaways:

1.     Repayment of Term Loan Installments: RBI has permitted all commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and non-banking financial companies (including housing finance companies and micro-finance institutions) (collectively, ‘Lending Institutions’) to allow a moratorium of 3 months on payment of instalments (including principal / interest installments, bullet repayments, EMIs or credit card dues) in respect of all term loans (including agricultural term loans, retail and crop loans) falling due between March 1, 2020 and May 31, 2020. Accordingly, if such option is availed, the repayment schedule as also the residual tenor for such loans will be shifted across the board by three (3) months after the moratorium period. Interest will continue to accrue on the outstanding portion of the term loans during the moratorium period.

2.     Interest Payments for Working Capital Loans in the form of Cash Credit / Overdraft: Lending Institutions are now permitted to allow a 3 month deferment on payment of interest in respect of such working capital facilities falling due between March 1, 2020 and May 31, 2020, with the accumulated interest being payable immediately after the expiry of this deferment period.

3.      Easing of Working Capital Financing: For working capital loans sanctioned in the form of cash credit or overdraft to borrowers facing stress on account of the economic fallout of the pandemic, Lending Institutions may recalculate drawing power by reducing margins and/or reassessing the working capital cycle. This relief will be available in respect of all such changes effected up to May 31, 2020 and will be contingent on the Lending Institutions being satisfied that the same is necessitated on account of the economic fallout from the pandemic. Such accounts will be made subject to subsequent supervisory review with respect to their justifiability.

4.     Does Not Amount to ‘Financial Difficulty’ or ‘Default’: None of the changes proposed at paragraphs 1 to 3 above will result in an asset classification downgrade as they are not to be treated as ‘a change in terms and conditions of loan agreements and/ or concessions granted due to financial difficulties’ of the borrowers. Further, such rescheduling of payments will not amount to a ‘default’ for the purposes of supervisory reporting or reporting to credit information companies (‘CICs’) by the Lending Institutions. CICs have been directed to ensure that any such action (proposed at paragraphs 1 to 3 above) by Lending Institutions does not adversely impact the credit history of the relevant borrower.

5.     Determination of Asset Classification: The asset classification of term loans which are granted relief as per paragraph 1 above will be determined on the basis of revised due dates and the revised repayment schedule. Similarly, in case of working capital facilities where relief is provided as per paragraph 2 above, the ‘Special Mention Account’ and the ‘out of order’ status will be evaluated considering the application of accumulated interest immediately after the completion of the deferment period as well as the revised terms, as permitted in terms of paragraph 3 above.

6.       Other Conditions:

(a)   Lending Institutions are required to put in place a board of directors approved policy in respect of the above, which will also include objective criteria for considering reliefs under paragraph 3 above. Such policy will be disclosed in the public domain.

(b)   Wherever the exposure of a Lending Institution to a borrower is more that INR 5 Crore as on March 1, 2020, such Lending Institution is required to develop a management information system (‘MIS’) in the reliefs provided to its borrower. Such MIS will inter alia include borrower-wise and credit-facility wise information regarding the nature and amount of relief granted by the Lending Institution.

(c)    The board of directors and the key management personnel of each of the Lending Institutions are required to ensure that the above-stated instructions are communicated in their respective organisations and clear instructions are issued regarding implementation.