India: Clarity In Chaos – RBI's Directive And Judiciary's Stand On NPA Classification

Mr. Shaktikanta Das, the Governor of the Reserve Bank of India (RBI) in his statement on April 17, 2020, addressed the situation caused due to the ongoing pandemic and stated "Today, humanity faces perhaps the trial of its time as COVID-19 grips the world in its deadly embrace. Everywhere, as also in India, the mission is to do whatever it takes to prevent epidemiological curve from steepening any further. Human spirit is ignited by the resolve to overcome the pandemic. It is during our darkest moments that we must focus on the light."

Starting March 25, 2020, in response to the COVID – 19 pandemic which has affected the world at large, India has been under a complete lockdown. While it can be agreed upon without any doubt that health and safety of the citizens deserves utmost importance and supremacy, at the same time, it is also relevant to consider that the lockdown and the consequent restraint on commercial activities and economic operations has had a considerable impact on the economy of the country.

As is common knowledge, in the last few years, the financial sector of the country has been marred by and has been under considerable pressure due to the rising rates of defaults in repayment of facilities obtained by companies and the corresponding increase in the declaration of such accounts as Non-Performing Assets (NPAs).

Due to the lockdown and the restraint on commercial operations, the chances of failure in repayment of facilities have further increased. This poses a serious threat on the fate of the businesses that may play a crucial role in maintaining and thereafter, growing and strengthening the economy once the lockdown is lifted and the commercial operations recommence.

The RBI has been proactive in addressing the tenuous financial situation caused due to the lockdown by introducing regulatory policies and packages at regular intervals, so as to mitigate the burden of debt servicing brought about by the disruption on account of the lockdown.

For instance, immediately after the country-wide lockdown on March 25, 2020, the RBI vide Regulatory Package dated March 27, 2020 and a corresponding Circular of the even date, has inter alia allowed all commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies) to grant a moratorium of 3 (three) months on payment of all instalments in respect of all term loans, falling due between March 01, 2020 and May 31, 2020. Interest, however, will continue to accrue on the outstanding portion of the term loans during the moratorium period. Further, with respect to working capital facilities, the RBI has allowed the lending entities to defer the recovery of interest applied during the period from March 01, 2020 up to May 31, 2020. Regarding asset classification, the said Regulatory Package mentions that the asset classification of term loans which would be granted the relief of moratorium would be determined based on revised due dates and the revised repayment schedule. Similarly, working capital facilities where the aforementioned relief of deferment of recovery of interest is provided, 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.

While the aforesaid RBI Package prescribes that moratorium may be granted to all borrowers and the repayment schedule for such loans as also the residual tenor will be shifted across the board by 3 (three) months after the moratorium period, however, the Indian Banks Association (IBA) under the FAQs issued by it on 'RBI Allowed Banks to Declare Moratorium on Term Loans' in consultation with the Ministry of Finance (also published by the Press Information Bureau), provides that the benefit of the moratorium is available to all loan accounts, which are 'Standard Assets' as on March 01, 2020. The relevant extract of the FAQs is reproduced below for reference:

"Which are the facilities eligible for availing the benefits under the RBI Covid- 19 regulatory package and whether the facility is extended across the board to all borrowers?

The term 'Standard Assets' as per the Master Direction - Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 (updated as on October 17, 2016) is defined to mean "the asset in respect of which, no default in repayment of principal or payment of interest is perceived and which does not disclose any problem or carry more than normal risk attached to the business"

Thereafter, on April 17, 2020, the RBI has issued another COVID – 19 Regulatory package which inter alia provides that in respect of all accounts classified as standard as on February 29, 2020, even if overdue, the moratorium period (if granted), would be excluded by the lending institutions from the number of days past due for the purpose of asset classification.

It is relevant to note that recently, the judiciary has also passed a few orders wherein much needed relief to companies in financial distress has been provided.

It is noteworthy that vide order dated March 30, 2020 in the matter of Rural Fairprice Wholesale Limited & Anr. vs. IDBI Trusteeship Services Limited & Ors. bearing Commercial Suit No. (L) 307 of 2020, the Hon'ble High Court of Bombay considered the present market situation and the impact of COVID-19 and granted ad interim relief to the Plaintiffs and a permanent injunction against IDBI Trusteeship Services Limited from acting (including selling) with respect to the equity shares pledged with them by the Petitioners by way of a Debenture Trust Deed. In this matter, the Defendants contended that they had to recover an amount in excess of INR 610 Crore from the Plaintiffs and as per the current market value, the value of the shares pledged by the Plaintiffs was not more than INR 350 Crore. However, the Court observed that due to the ongoing pandemic, the value of the shares had diminished and in such a situation, the Plaintiffs required ad interim protection. Consequently, the Defendants were restrained from acting with respect to the shares pledged with them by the Plaintiffs. It is relevant to note that the aforesaid order dated March 30, 2020 was challenged before the Hon'ble Supreme Court of India vide Special Leave Petition (Civil) Diary No. 10943 / 2020 titled UBS AG London Branch vs Rural Enterprise Wholesale Limited & Ors. However, by way of order dated April 17, 2020, the Hon'ble Supreme Court refused to interfere with the impugned order and accordingly, dismissed the Special Leave Petition. It is therefore apparent that even the Hon'ble Supreme Court has taken cognizance of the financial difficulties of stakeholders de hors the relief packages announced by the RBI.

Interestingly, vide order dated April 06, 2020 in the matter of Anant Raj Limited vs. Yes Bank Limited bearing W.P. (C) URGENT No. 5/2020, the Hon'ble High Court of Delhi observed that the account of the Petitioner could not have been classified as NPA by Yes Bank Limited on March 31, 2020. In this matter, the Petitioner inter alia relied upon the Statement on Development and Regulatory Policies issued by RBI on March 27, 2020 and the RBI Regulatory policy dated March 27, 2020 and contended that one of the objects of the said policy is to ease the financial stress caused by COVID-19 disruptions by relaxing repayment pressures and improving access to working capital and further improving the functioning of markets in view of the high volatility experienced with the onset and spread of the pandemic. The Petitioner further content that it could not service the debt because of adverse economic conditions brought about by the effects of the COVID-19 pandemic. The Hon'ble High Court observed that a reading of the Statement on Development and Regulatory Policies issued by the RBI on March 27, 2020 along with Regulatory Package issued on March 27, 2020 prima facie shows that the intention of the RBI is to maintain status quo as on March 01, 2020 with regard to all the instalment payments which had to be made post March 01, 2020 till May 31, 2020. Hence, the High Court held that the classification of the account of the Petitioner as an NPA on March 31, 2020 could not have been done by Yes Bank Limited. Accordingly, status quo ante was restored qua the classification of the account of Anant Raj Limited and the classification as it stood on March 31, 2020 was restored.

This said, it is pertinent to note that in the abovementioned order of the Hon'ble High Court of Delhi, RBI's relief of moratorium was extended to a loan account categorized as a SMA-2 in the books of the lender (i.e. which was not a 'Standard Asset'), which is in contradiction with the FAQs issued by the IBA on 'RBI Allowed Banks to Declare Moratorium on Term Loans'.

Another important decision is the order dated April 09, 2020 passed by the Hon'ble High Court of Delhi in the matter of Indiabulls Commercial Credit Ltd vs. SIDBI & Anr. bearing W.P. (C) No. 2955/2020. This Writ Petition was filed by Indiabulls Commercial Credit Ltd., a NBFC (and borrower of SIDBI) seeking directions to the SIDBI to comply with the RBI Regulatory Package issued on March 27, 2020 (RBI was also impleaded as a Respondent), and a consequent direction restraining SIBDI from recovering any amounts during the moratorium imposed by the RBI. It was the case of the Petitioner that they were paying all the instalments and the loan amount for the month of March, 2020 had also been paid. The Petitioner contended that RBI had issued the aforesaid Regulatory package to give temporary relief to the borrowers, subject to the borrowers making the said request. Consequently, the Petitioner sought such relief from SIDBI. In response to the same, SIDBI contended that they were awaiting clarifications from the RBI as to whether, the package will be applicable to NBFCs like the Petitioner. Further, in the interregnum, the Petitioner had already made the payment for April, 2020. After hearing the parties, the Hon'ble Court held that since the payment had been made, the Petition became infructuous. However, the Hon'ble Court clarified that the SIDBI will not raise any further demand on the Petitioner towards the due instalments against the Petitioner till it obtains a clarification from the RBI.

The Hon'ble High Court of Bombay vide its order dated April 11, 2020 in the matter of Transcon Skycity Pvt Ltd & Ors. vs. ICICI Bank & Ors. and Transcon Ironica Pvt Ltd & Ors. vs. ICICI Bank & Ors. bearing Writ Petition LD-VC No. 28 of 2020 and Writ Petition LD-VC No. 30 of 2020 respectively, relied upon the abovementioned order passed by the Hon'ble Delhi High Court in the matter of Anant Raj Limited vs. Yes Bank Limited and held that the period of the moratorium during which there is a lockdown will not be reckoned by ICICI Bank for the purposes of computation of the 90 (ninety) day NPA declaration period. Hence, the Hon'ble Court observed that in the said matter, the period from March 01, 2020 up to May 31, 2020 during which there is a lockdown, will stand excluded from the 90 (ninety) day NPA declaration computation until the lockdown is lifted. The Court further held that irrespective of the continuance of the moratorium until May 31, 2020, if the lockdown is lifted at an earlier date than May 31, 2020, then the protection available to the Petitioners will cease on the date of lifting of the lockdown and the computing and reckoning of the remainder of the 90 (ninety) day period will start from that earlier lifting of the lockdown ending date.

Similarly, by way of order dated April 13, 2020 in the matter of Shakuntala Educational & Welfare Society vs. Punjab & Sind Bank bearing W.P. (C) No. 2959 / 2020, wherein the Petitioner sought directions against Punjab & Sind Bank to not declare its loan accounts as NPA, the Hon'ble High Court of Delhi relied upon the order passed in the matter of Anant Raj Limited vs. Yes Bank Limited and observed that any classification of the Petitioner's accounts as NPA would certainly amount to altering the position as existing on March 01, 2020. Therefore, grave and irreparable loss will be caused to the Petitioner in case its accounts are declared as NPA only on account of its failure to pay the instalments, which were admittedly payable on or before March 31, 2020. In view of the same, the Hon'ble High Court restrained Punjab & Sind Bank from classifying the accounts of the Petitioner as NPA till the next date of hearing.

Having observed the conclusions drawn from all the above mentioned Delhi High Court and Bombay High Court orders which essentially stipulate that asset classification of loan accounts should not be further downgraded and status quo should be maintained during the moratorium period i.e. March 01, 2020 to May 31, 2020, it is also pertinent to mention about another recent order dated April 07, 2020, passed by the Hon'ble High Court of Bombay, in the matter of Ideal Toll & Infrastructure Private Limited and Anr. vs. ICICI Home Finance Co. Limited, Mumbai and Anr. bearing Commercial Suit No. LD-VC-7 of 2020 along with Interim Application No. LD-VC-7 (IA) of 2020 and Mrs. Anuya Jayant Mhaiskar vs. ICICI Home Finance Co. Limited and Anr. bearing Commercial Suit No. LD-VC-8 of 2020 along with Interim Application No. LD-VC-8 (IA) of 2020, wherein the Hon'ble Bombay High Court directed the borrower to repay the overdues which fell due before March 01, 2020, the moratorium start date, as per the rescheduled repayment dates proposed by the Bombay High Court, falling between April 18, 2020 and May 15, 2020. The Hon'ble High Court further observed that except for the pledge of shares which was already invoked by the lender, no further pledge shall be invoked and the loan account shall not be classified as an NPA by the lender, unless there occurs a default in respect of the amounts payable by the borrower pursuant to the rescheduled repayment dates stipulated by the Hon'ble High Court.

Further, recently vide order dated April 17, 2020 in the matter of JR Toll Road Private Limited vs Yes Bank Limited bearing W.P. (C) 2970/2020, the Hon'ble High Court of Delhi relied upon the order passed in the Anant Raj matter mentioned hereinabove as well as the statement made by the Governor of RBI on April 17, 2020 and held that the Petitioner (borrower) would be entitled to the restoration of status quo ante, as status of its account existed on March 01, 2020. At the same time, the Hon'ble High Court directed the Petitioner to liquidate the amount due to the Respondent (lender) as on December 31, 2019 within 5 (five) weeks of an event specified in the said order, being opening of the toll fee plaza. In this regard, the Hon'ble Court observed that such amount was due much prior to the striking of the pandemic in the country (which was being relied upon by the Petitioner). Hence, the Hon'ble High Court directed that the said amount should be paid by the Petitioner to the Respondent within the specified time period.

Hence, as can be seen from above, the regulator i.e. the RBI as well as the judiciary are taking steps to ensure that some much-needed comfort is provided to businesses in these unprecedent times. At the same time, it can be observed that in certain cases, the judiciary has attempted to adopt a balanced approach by ensuring that while status quo is observed regarding the status of accounts of the borrowers, at the same time, such borrowers pay the amounts which were outstanding to the lenders prior to the grave situation caused by the pandemic.. These measures being undertaken by the RBI and the judiciary are in the best interest of the economy and the country at large. However, their true effect would only be seen once the lockdown is lifted and the business operations recommence with full force. It is imperative that a cautious, well balanced and empathetic approach is adopted by all stakeholders so as to collectively take our country's economy forward.

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