The Reserve Bank of India (‘RBI’) had announced the COVID-19 – Regulatory Package on March 27, 2020 (‘Regulatory Package’), wherein lending institutions were permitted to grant a moratorium of three months on payment of all instalments falling due between March 1, 2020 and May 31, 2020 (‘Moratorium Period’), as set out in our Client Alert dated March 31, 2020.

RBI, on April 17, 2020, released the Governor’s Statement in response to the COVID-19 crisis, wherein it introduced certain additional measures based on its continuing assessment of the macroeconomic situation and financial market conditions (‘Governor’s Statement’). The measures introduced in the Governor’s Statement are in addition to the Regulatory Package and are aimed at: (i) maintaining adequate liquidity in the system and its constituents in the face of COVID-19 related dislocations; (ii) facilitating and incentivising bank credit flows; (iii) easing financial stress; and (iv) enabling the normal functioning of markets.

The following additional measures have been introduced by RBI:

i.     TLTRO: RBI is going to conduct targeted long-term repo operations (‘TLTRO 2.0’) for an aggregate amount of Rs. 50,000 crore (approx. USD 6500 million), to begin with, in tranches of appropriate sizes. The funds availed by banks under TLTRO 2.0 should be invested in investment grade bonds, commercial paper, and non-convertible debentures of non-banking financial companies (‘NBFCs’), with at least 50 per cent of the total amount availed going to small and mid-sized NBFCs and micro finance institutions (‘MFIs’). These investments have to be made within one month of the availment of liquidity from RBI.

ii.     Refinancing Facilities for All India Financial Institutions (‘AIFIs’): Special refinance facilities for a total amount of Rs. 50,000 crore (approx. USD 6500 million) will be provided to the National Bank for Agriculture and Rural Development (‘NABARD’), Small Industrial Development Bank of India (‘SIDBI’) and National Housing Bank (‘NHB’), to enable them to meet sectoral credit needs. This will comprise: (i) Rs. 25,000 crore (approx. USD 3250 million) to NABARD for refinancing regional rural banks (‘RRBs’), cooperative banks and MFIs; (ii) Rs.15,000 crore to SIDBI (approx. USD 2000 million) for on-lending/refinancing; and (iii) Rs.10,000 crore (approx. USD 1300 million) to NHB for supporting housing finance companies (‘HFCs’). Advances under this facility will be charged at RBI’s policy repo rate at the time of availment.

iii.   Fixed Rate Reverse Repo Rate: It has been decided to reduce the fixed rate reverse repo rate under the liquidity adjustment facility by 25 basis points from 4.0 per cent to 3.75 per cent with immediate effect. The policy repo rate remains unchanged at 4.40 per cent, and the marginal standing facility rate and the bank rate remain unchanged at 4.65 per cent.

iv.     Ways and Means Advances (‘WMA’) for States: WMA is a mechanism used by RBI under its credit policy to states, banking with it, to help them tide over temporary mismatches in the cash flow of their receipts and payments. The WMA limit of States has been increased by 60 per cent over and above the level as on March 31, 2020. The increased limit will be available till September 30, 2020.

RBI has announced the following regulatory measures in addition to those announced by way of the Regulatory Package.

i.      Asset Classification: In respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day non-performing asset (NPA) norm will exclude the moratorium period, i.e. there would be an asset classification standstill for all such accounts during the Moratorium Period. Therefore, in line with the clarification provided by the Basel Committee on Banking Supervision in respect of all accounts classified as standard as on February 29, 2020, even if overdue, the moratorium period, wherever granted, will be excluded by the lending institutions from the number of days past-due for the purpose of asset classification under the Income Recognition and Asset Classification (IRAC) norms

Similarly, in respect of working capital facilities sanctioned in the form of cash credit/overdraft, the Regulatory Package permitted the recovery of interest applied during the Moratorium Period to be deferred. Such deferment period, wherever granted in respect of all facilities classified as standard, including Special Mention Accounts (SMAs), as on February 29, 2020, will be excluded for the determination of out of order status.

Banks will have to maintain higher provision of 10 per cent on all such accounts, in default but standard as described above, spread over two quarters, i.e. March, 2020 and June, 2020. These provisions can be adjusted later on against the provisioning requirements for actual slippages in such accounts.

The exclusions permitted above will be duly reckoned by the lending institutions in their supervisory reporting as well as reporting to credit information companies (‘CICs’); i.e. the days past due and SMA status, where applicable, as on March 1, 2020 will remain unchanged till May 31, 2020.

NBFCs, which are required to comply with Indian Accounting Standards, may be guided by the guidelines duly approved by their boards and as per advisories of the Institute of Chartered Accountants of India in recognition of impairments. In other words, NBFCs have flexibility under the prescribed accounting standards to consider such relief to their borrowers.

ii.    Extension of Resolution Timeline: Under RBI’s prudential framework of resolution of stressed assets dated June 7, 2019, (‘Prudential Framework’) in the case of large accounts under default, Scheduled Commercial Banks, AIFIs, Non-Deposit taking Systemically Important NBFCs and Deposit-taking NBFCs are currently 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. It has been decided that the period for resolution plan will be extended by 90 days.

Therefore, in respect of accounts which were within the review period as on March 1, 2020, the Moratorium Period will be excluded from the calculation of the 30-day timeline for the review period. In respect of all such accounts, the residual review period will resume from June 1, 2020, upon expiry of which the lenders will have the usual 180 days for resolution. In respect of accounts where the review period was over, but the 180-day resolution period had not expired as on March 1, 2020, the timeline for resolution will get extended by 90 days from the date on which the 180-day period was originally set to expire.

Consequently, the requirement of making additional provisions as per the Prudential Framework will be triggered as and when the extended resolution period, as stated above, expires. In respect of all other accounts, the provisions of the Prudential Framework will be in force without any modifications.

The lending institutions are required 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 the financial years FY2020 and FY2021.

iii.   Distribution of Dividend: Scheduled commercial banks and cooperative banks will not make any further dividend pay-outs from profits pertaining to the financial year ended March 31, 2020 until further instructions. This restriction will be reviewed on the basis of the financial position of banks for the quarter ending September 30, 2020.

iv.     Liquidity Coverage Ratio (‘LCR’): The LCR requirement for Scheduled Commercial Banks has been brought down from 100 per cent to 80 per cent with immediate effect. The requirement will be gradually restored back in two phases: 90 per cent by October 1, 2020 and 100 per cent by April 1, 2021. Further, the entire statutory liquidity ratio-eligible assets held by banks are now permitted to be reckoned as high quality liquid assets for meeting LCR.

v.     NBFC Loans to Commercial Real Estate Projects: The date for commencement for commercial operations (DCCO) in respect of loans to commercial real estate projects, if delayed for reasons beyond the control of promoters, can be extended by an additional one year, over and above the one-year extension permitted in normal course, without treating the same as restructuring. It has now been decided to extend a similar treatment to loans given by NBFCs to commercial real estate.