The disruptions caused on account of COVID – 19 have put immense financial stress on companies around the world, leading to severe challenges in debt servicing.
On 27 March 2020, the Reserve Bank of India (RBI) announced a stimulus package comprising multi-pronged measures to ease some of this stress faced by Indian businesses (RBI Package 1.0).1 Based on its assessment of the macroeconomic situation and financial market conditions, on 17 April 2020, the RBI announced certain additional measures to maintain adequate liquidity, facilitate and incentivise bank credit flows, ease financial stress and enable normal functioning of markets (RBI Package 2.0).2
One of the key measures announced under these RBI Packages is with respect to loan moratorium and standstill on asset classification. These announcements have given rise to some interesting questions around lenders' rights under these measures.
A. WHAT THE RBI PACKAGES PROVIDE ON LOAN MORATORIUM AND ASSET CLASSIFICATION
RBI Package 1.0
Under the RBI Package 1.0, in respect of all term loans, all lending institutions were permitted to allow a moratorium of three months on payment of all instalments falling due between 1 March 2020 and 31 May 2020. Accordingly, the repayment schedule and tenor for such loans would stand shifted by three months. Interest on outstanding amount would continue to accrue during this period and be payable after the expiry of the deferment period. Similar three-month deferment of interest payments was allowed in respect of working capital facilities and banks were also allowed to recalculate the drawing power.
Significantly, the RBI clarified that such moratorium/ deferment/ recalculation of the 'drawing power' will not be treated as concession or change in terms and conditions of loan agreements due to financial difficulty of the borrower under the RBI's 'Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances'.3 Consequently, such a measure, by itself, shall not result in asset classification downgrade.
RBI Package 2.0
The RBI Package 2.0 provides that in respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on 1 March 2020, the 90-day norm for declaration as a Non-Performing Asset (NPA) shall exclude the moratorium period i.e. there would be an asset classification standstill for all such accounts from 1 March 2020 to 31 May 2020. This decision is based on RBI's recognition of the fact that the onset of COVID – 19 has exacerbated the challenges for borrowers even to honour their commitments fallen due on or before 29 February 2020 in standard accounts and the recent announcement made by The Basel Committee on Banking Supervision on exclusion of payment moratorium period relating to the COVID – 19 outbreak from the number of days in respect of NPA recognition.
In respect of non-banking finance companies (NBFCs), which are required to comply with Indian Accounting Standards, it has been provided that they 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.
As part of the measures pertaining to standstill on asset classification, it has further been provided that banks will have to maintain higher provision of 10 % on all such accounts under the standstill, spread over two quarters, i.e., March 2020 and June 2020. The RBI has clarified that these provisions can be adjusted later on against the provisioning requirements for actual slippages in such accounts.
B. THE GREY AREAS
With the outbreak of COVID – 19, economic activities have been thrown out of gear. In these turbulent times, the three-month loan moratorium coupled with relief against asset classification downgrade, as envisaged under the RBI Packages, has indeed come as a much-needed succour to harried borrowers. However, not everything about these measures is black and white.
After announcement of the RBI Package 1.0, various interpretational questions started cropping up, for instance, whether the loan moratorium is applicable to defaults only in respect of current dues (i.e. loans falling due between 1 March - 31 May 2020) or even prior defaults, whether classification of a loan account can be changed from special mention account – 2 (SMA – 2) to NPA during moratorium period, whether it applies to NBFCs as borrowers, whether banks have the liberty to decide on grant of reliefs to their borrowers and implications for creditors' rights to enforce/ recover their dues.
Meanwhile, borrowers defaulting on their repayment obligations, purportedly on account of COVID – 19 disruptions, and faced with the threat of creditor actions rushed to courts claiming entitlement to the three-month loan moratorium and seeking reliefs such as stay on asset classification downgrade and creditor enforcement actions against them. In a series of orders, albeit interim, the High Courts of Delhi and Bombay granted defaulting borrowers some respite against classification of their loan accounts as NPA and against invocation/ sale of shares pledged by them as security for their loans, even where default had occurred prior to 1 March 2020. Further, in a few cases, while providing interim relief, the courts also directed the borrowers to clear payments of the outstanding amounts as per revised timelines decided by the court, failing which the borrower would be in default and become liable to face attendant consequences.
Relevant Court Orders
The High Courts of Delhi and Bombay have used different parameters to grant interim reliefs in respect of loan defaults occurring prior to 1 March 2020.
In Anant Raj Limited v Yes Bank Limited (Anant Raj)4 and Shakuntala Educational & Welfare Society v Punjab & Sind Bank (Shakuntala)5 the High Court of Delhi expressed its prima facie view that status quo as on 1 March 2020 is to be maintained and hence accounts which were already in default prior to 1 March 2020 cannot further be classified as an NPA in case the outstanding dues are not paid during the three-month moratorium period. In Indiabulls Housing Finance Limited v Securities and Exchange Board of India (IHFL),6 the High Court of Delhi did not express any view on loan moratorium and granted interim relief in respect of liability towards non-convertible debenture holders, noting 'the peculiar facts of this case and the present lockdown'.
On the other hand, in Ideal Toll & Infrastructure Pvt. Ltd., Mumbai and Anr. v ICICI Home Finance Co. Ltd., Mumbai & Anr. (Ideal Toll),7 the Bombay High Court expressed a view that the grant of moratorium of three months would not apply to instalments which were due prior to 1 March 2020. However, the Court held that in 'these times' steps must be taken to protect the rights of both parties. Hence considering the fact that the plaintiffs' income stream was seriously depleted and in order to meet the ends of justice, the Court devised a revised payment schedule and directed that none of the pledged shares shall be sold by the defendants and the plaintiffs' loan account shall not be declared as NPA till a default is committed in making the payments as per the revised schedule.
Earlier, in another case relating to share pledge invocation, the Bombay High Court, in Rural Fairprice Wholesale Limited & Anr. v IDBI Trusteeship Services Limited & Ors. (Rural Fairprice),8 granted ad-interim protection to the plaintiffs (companies belonging to the Future Group) by restraining the defendants from selling the shares of another group company, which were pledged under a debenture trust. While in this case, the Bombay High Court did not specifically deal with the applicability of the loan moratorium, it granted stay on sale of the pledged shares after noting that the market value of the shares had fallen to below INR 100/- per share (from INR 350/- per share when the debenture trust deed was executed) and that the collapse in share market was due to COVID – 19. The interim order was challenged before the Supreme Court in UBS AG London Branch v Rural Enterprise Wholsale Limited & Ors.9 However, the Supreme Court refused to interfere.
The Ideal Toll order was referred to and somewhat relied upon in Transcon Skycity Pvt. Ltd. & Ors. v ICICI Bank & Ors. (Transcon). 10 Here also, rather than proceeding on the basis of moratorium, the Court noted that at ad-interim stage it should attempt to preserve the parties in status quo ensuring minimal prejudice to both sides in these 'unprecedented and exceptionally difficult times'. Hence, it proceeded to fashion a 'workable order', excluding the 'lockdown period' from NPA calculation.
Now, as per the RBI Package 2.0, the three-month moratorium period will be excluded while calculating the 90-day period for NPA classification, in respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on 1 March 2020 i.e. there would be an asset classification standstill for standard accounts from 1 March 2020 to 31 May 2020. In other words, an account which is SMA – 2 as on 29 February 2020 (as in the case of Anant Raj, for instance), cannot further be classified as NPA during the three-month moratorium period. The 90-day clock for NPA computation would stop running from 1 March 2020 and would only resume on 1 June 2020 (unless the RBI extends the moratorium period).
The RBI Package 2.0 has brought much-needed clarity on asset classification standstill. However, the following remain unresolved –
- Mandatory or directory?
As per the RBI Package 1.0, the lending institutions were permitted to allow moratorium and were required to frame board approved polices for providing the reliefs to all eligible borrowers. This resulted in confusion as to whether the provisions on three-month loan moratorium are mandatory or directory in nature. The RBI announcement was followed by policy announcements made by various public and private sector banks in respect of modalities for providing these reliefs. A review of bank-specific policy announcements showed that while some banks provided an 'opt-in' (where borrowers are required to specifically inform their bank if they wish to avail the moratorium), some announced an 'opt-out' (automatic moratorium unless specifically notified by the borrowers), while some others asked borrowers to specifically apply for moratorium for banks to consider on a case by case basis. As per some news reports, the RBI had approached certain lending institutions stating that borrowers should by default be considered under moratorium, whether they opted-in or otherwise.
It was hoped that the RBI would specifically clarify whether the provisions with respect to grant of three-month moratorium are mandatory or directory in nature. However, no such clarification has been issued under RBI Package 2.0. Rather, it states that the standstill on asset classification (from 1 March 2020 to 31 May 2020) would apply to all such accounts for which lending institutions decide to grant moratorium or deferment. This may again lead to the inference that the lending institutions are not as such bound to grant moratorium or deferment with respect to all accounts and the discretion, in this respect, vests with the individual banks or financial institutions.
- Status of NBFCs loans?
Since the announcement of the RBI Package 1.0, there had been some lack of clarity with respect to applicability of moratorium provisions to NBFC liabilities, i.e. whether NBFCs as borrowers are entitled to get three-month relief in respect of their repayment obligations. Certain bank lenders to NBFCs are taking a view that NBFCs are not eligible under the RBI Package 1.0 for these reliefs. In Indiabulls Commercial Credit Ltd. v SIDBI & Anr.,11 the petitioner (an NBFC) sought a direction to SIDBI to comply with the RBI circular dated 27 March 2020 and a consequent direction restraining SIDBI from recovering any amounts during the moratorium period. SIDBI submitted that it was in the process of obtaining clarification from the RBI on the issue whether the RBI circular would apply to an NBFC. The petition was disposed of as infructuous with, inter alia, a clarification that SIDBI will not raise any demand on the petitioner towards the due instalments till it obtains a clarification from the RBI.
While the RBI Package 2.0 contains provisions relating to NBFCs in their capacity as lenders, there is no specific provision or clarification as to whether or not NBFCs are eligible for being granted moratorium on their loan repayments. For NBFCs, which have huge outstanding amounts owed to banks, the silence of the RBI on the question of their eligibility for availing the three-month moratorium is likely to be of significant concern in terms of asset-liability mismatch and liquidity challenges. It also ends up leaving the NBFC eligibility question to be decided by the banks, thus perpetuating the already prevailing uncertainty on this issue.
- Where do lending institutions stand qua debts which fell due prior to 1 March 2020?
The loan moratorium envisaged under the RBI Packages is limited to the period between 1 March 2020 to 31 May 2020. But what about past dues/ defaults i.e. those which occurred on or before 29 February 2020? What remedies do lending institutions have in this respect?
Ordinarily, a lending institution has three avenues in respect of its outstanding dues i.e. (i) file recovery proceedings; (ii) enforce security, if any; (iii) initiate insolvency proceedings against the debtor.
Unlike other countries such as France, Singapore and Italy, India has, so far, not seen any express restriction (in light of COVID – 19) on creditors' rights of enforcement/ recovery of their dues. In other words, in the wake of the COVID – 19 outbreak, no law has been introduced specifically barring lenders from accelerating/ recalling their loans, filing for recovery or enforcing security in respect of their loans which fell due prior to 1 March 2020. As regards insolvency filings, the Central Government has increased the threshold for corporate insolvency filings under the Insolvency and Bankruptcy Code, 2016 to INR 1 crore (from INR 1 lakh), in a stated attempt to protect MSMEs. Further, depending on how the COVID – 19 situation unfolds, it may also consider suspending corporate insolvency filings for a period of six months, to stop companies at large from being forced into insolvency proceedings. If introduced, such suspension would end up restraining lending institutions from taking recourse to Section 7 of the Code, for insolvency resolution of their corporate debtors. In any event, during this period of restricted access to judiciary, insolvency filings are not considered urgent for purpose of any filing or hearing.
The measures announced by the RBI with respect to moratorium on loan repayments and asset classification restrictions pertain to the regulatory and supervisory domain. While there is no general moratorium in respect of creditors' enforcement/ recovery actions for dues falling prior to 1 March 2020, the measures announced by the RBI would impact NPA declaration on and after 1 March 2020, thereby restraining eligible creditors from taking action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. It remains to be seen what stand the courts will take where enforcement action is initiated by a bank in respect of accounts that were already NPA prior to 1 March 2020.
Pertinently, the Bombay High Court, in Rural Fairprice and Ideal Toll, granted interim protection to borrowers against enforcement of security in the form of pledged shares, even when the default had already taken place before 1 March 2020. In fact, in Ideal Toll, the Court took a view that moratorium does not apply and even recognised the creditor's vested right to sell the pledged shares. Though submissions were made on sharp decline in price of the shares, the Court proceeded to pass the restraining order in view of the fact that the borrower's income stream was seriously depleted. While doing so, it imposed conditions in respect of payment as per revised schedule. In Rural Fairprice, the Court noted the fall in the market value of the shares since the time of execution of the debenture trust deed and observed that the collapse in share market was due to COVID – 19, and, thus, concluded that the plaintiffs required ad-interim protection against sale of the pledged shares till the next date. The Supreme Court declined to interfere with the Bombay High Court order in Rural Fair Price. This may have significant implications for lending institutions seeking to recover their dues and/ or enforce security in case of defaults pre-dating 1 March 2020.
C. CONCLUDING THOUGHTS
The measures in respect of loan moratorium and asset classification standstill, announced under the RBI Packages, are aimed at alleviating the impact of COVID – 19 pandemic on businesses and financial institutions. The primary objective appears to be to prevent borrowers from ending up as defaulters for failing to meet their loan repayment obligations during the relevant period (i.e. 1 March 2020 to 31 May 2020) and thus, staving off debt recovery actions in these already difficult times. It is to be noted that the relief of asset classification standstill as on 1 March 2020, which benefits borrowers with loan accounts which were already in default (but standard) before 1 March 2020, has been specifically introduced under the RBI Package 2.0. However, shielding such borrowers against recovery/ enforcement actions based on subjective assessment of financial difficulties or stock market trends during the lockdown period and in the absence of any specific law to this effect may, in fact, end up causing more damage than good by putting the health of financial institutions at grave risk.
Further, expeditious clarifications from the RBI on questions regarding nature of the loan moratorium provisions (whether binding or not) and NBFC eligibility, as also whether loan moratorium entails suspension of creditor actions (other than asset classification downgrade) will help to dispel the clouds of uncertainty and go a long way towards avoiding unnecessary litigation. Otherwise, one can expect to witness a deluge of cases around these issues as the nation gradually emerges from the lockdown.
2. https://rbidocs.rbi.org.in/rdocs/Content/PDFs/GOVERNORSTATEMENTF22E618703AE48A4B2F6EC4A8003F88D.PDF. This statement is to be read with other related notifications available on the RBI website. A separate circular contains detailed instructions with respect to asset classification and provisioning.
4. W.P.(C) Urgent 5/2020, Order dated 6 April 2020
5. W.P. (C) 2959 of 2020, Order dated 13 April 2020
6. W.P.(C) 2963/2020 & CM APPLs. 10281-85/2020, Order dated 15 April 2020
7. Commercial Suit No. LD-VC-7 of 2020, along with IA No. LD-VC-7(IA) of 2020 (with connected matter), Orders dated 7 April 2020
8. Interim Application No. 1 of 2020 in Commercial Suit (L) 307 of 2020, Order dated 30 March 2020
9. Special Leave Petition (Civil) Diary No(S). 10943/2020, Order dated 17 April 2020
10. Writ Petition LD-VC No. 28 of 2020 (with connected matter), Order dated 11 April 2020
11. W.P.(C) 2955/2020, Order dated 9 April 2020
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