RBI Publishes Guidance on Regulatory Measures to Ease COVID Impact

Prudential framework on resolution of stressed assets. This framework stipulates that all lenders must put in place Board-approved policies for resolution of stressed assets, including the timelines for resolution. Since default with any lender is a lagging indicator of financial stress faced by the borrower, it is expected that the lenders initiate the process of implementing a resolution plan even before a default. Once a borrower is reported to be in default by any of the specified lenders, lenders shall undertake a review of the borrower account within thirty days from such default (which is the Review Period). During this Review Period of thirty days, lenders may decide on the resolution strategy, including the nature of the resolution plan and the approach for implementation of the resolution plan. The lenders may also choose to initiate legal proceedings for insolvency or recovery. Earlier, in a circular issued on April 17, 2020, RBI had announced an extension of the resolution timelines under the prudential framework on resolution of stressed assets. Given the continued challenges to resolution of stressed assets in light of the COVID-19 pandemic, as a partial modification of the April timelines, RBI is further extending the timelines as follows: 

• In respect of accounts that were within the Review Period as on March 01, 2020, the period from March 01, 2020 to August 31, 2020 shall be excluded from the calculation of the 30-day timeline for the Review Period. In respect of all such accounts, the residual Review Period shall resume from September 01, 2020, upon expiry of which the lenders shall 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 01, 2020, the timeline for resolution shall get extended by 180 days from the date on which the 180-day period was originally set to expire.
• The requirement of making additional provisions specified in paragraph 17 of the prudential framework shall be triggered as and when the extended resolution period, as stated above, expires.

Rescheduling of payments for term loans and working capital facilities. In view of the continuing disruption on account of COVID-19 pandemic, 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) are permitted to extend the moratorium by another three months—that is, from June 01, 2020 to August 31, 2020—on payment of all installments in respect of term loans (including agricultural term loans, retail, and crop loans). Accordingly, the repayment schedule for such loans, as also the residual tenor, will be shifted across the board. Interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period. In respect of working capital facilities sanctioned in the form of cash credit or overdraft (CC/OD), lending institutions are permitted to allow a deferment of another three months, from June 01, 2020 to August 31, 2020, on recovery of interest applied in respect of all such facilities. Lending institutions are permitted, at their discretion, to convert the accumulated interest for the deferment period up to August 31, 2020, into a funded interest term loan (FITL) which shall be repayable not later than March 31, 2021.

Easing of working capital financing. In respect of working capital facilities sanctioned in the form of CC/OD to borrowers facing stress on account of the economic fallout of the pandemic, lending institutions may, as a one-time measure, recalculate the "drawing power" by reducing the margins till August 31, 2020. However, in all such cases where such a temporary enhancement in drawing power is considered, the margins shall be restored to the original levels by March 31, 2021. Lending institutions may also review the working capital sanctioned limits up to March 31, 2021, based on a reassessment of the working capital cycle. Moreover, accounts provided relief under these instructions shall be subject to subsequent supervisory review with regard to their justifiability on account of the economic fallout from COVID-19. Lending institutions may, accordingly, put in place a Board approved policy to implement these measures.

Classification of assets.The conversion of accumulated interest into a funded interest term loan and the changes in the credit terms permitted to the borrowers to specifically tide over economic fallout from COVID-19 (mentioned above) will not be treated as concessions granted due to financial difficulty of the borrower and, consequently, will not result in asset classification downgrade. In respect of accounts classified as standard as on February 29, 2020, even if overdue, the moratorium period, wherever granted in respect of term loans, shall 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 norms. The asset classification for such accounts shall be determined on the basis of revised due dates and the revised repayment schedule. Similarly, in respect of working capital facilities sanctioned in the form of CC/OD, where the account is classified as standard, including special mention accounts, as on February 29, 2020, the deferment period, wherever granted, shall be excluded for the determination of out of order status.