Corollary of RBI's COVID-19 Package on the Timelines for Distressing the Stressed Assets

PRUDENTIAL FRAMEWORK FOR RESOLUTION OF STRESSED ASSETS

Reserve Bank of India (“RBI”) Circular dated 7th June 2019 on “Prudential Framework for Resolution of Stressed Assets” provides that if principal or interest payment or any other amount wholly or partly in respect of a loan is overdue between 1 to 30 days, 31 to 60 days and 61 to 90 days then borrower’s account is classified as Special Mention Account-0 (“SMA-0”), Special Mention Account-1 (“SMA-1”) and Special Mention Account-2 (“SMA-2”) respectively. If default in payment of principal or interest or both wholly or partly continues beyond 90 days the that particular loan account is classified as Non-Performing Asset (“NPA”).The crossing of time period beyond 90 days becomes the trigger point to bring the borrower by any lender of the defaulted loan under the prima facie review of the borrower account within 30 days from such default. This 30 days time period is known as Review Period.

During Review Period, lenders deliberate over the resolution plan to make good the default of the borrower within next 180 days from the date on which Review Period will end by way of the implementation of the resolution plan. The resolution strategy may also include initiation of insolvency proceedings against the defaulting borrower under the aegis of the Insolvency and Bankruptcy Code,2016 (“Code”) and majority of bankers were taking the route of distressing their stressed assets as prescribed under the Code.

To overcome the unprecedented repercussions due to outbreak of COVID-19 on the domestic and worldwide business of the economy the form of business completely or partly at halt, capital stuck across various channels, disturbed liquidity and credit flow; RBI came out with another Circular on 17th April 2020 announcing regulatory measures aimed at alleviating the impact of COVID- 19 on businesses and financial institutions of India titled as “COVID19 Regulatory Package – Review of Resolution Timelines under the Prudential Framework on Resolution of Stressed Assets”.

The Circular provided following revisions in the context 7th June 2019 Circular:

a)   Accounts which were within the Review Period as on 1st March, 2020, the period from 1st March 2020 to 31st May 2020 shall be excluded from the Review Period. In respect of all such accounts, the residual Review Period shall resume from 1st June 2020 upon expiry of which the lenders shall have the usual 180 days for resolution.

b)   In respect of accounts where the Review Period was over but the 180 days resolution period had not expired as on 1st March 2020, the timeline for resolution shall get extended by 90 days from the date on which the 180 days time period was originally set to expire.

Considering the ongoing challenges for stressed assets in present situation due to grave impact of COVID-19 on the business, RBI further released a Circular on 23rd May 2020 providing extensions to the timelines provided by RBI vide its Circular dated 17th April 2020 as follows:

a)   Accounts which were within the Review Period as on 1st March, 2020, the period from 1st March 2020 to 31st August,2020 shall be excluded from the Review Period. In respect of all such accounts, the residual Review Period shall resume from 1st September,2020 upon expiry of which the lenders shall have the usual 180 days for resolution.

b)   In respect of accounts where the Review Period was over but the 180 days resolution period had not expired as on 1st March 2020, the timeline for resolution shall get extended by 180 days from the date on which the 180 days time period was originally set to expire.

RBI’s COVID-19 REGULATORY PACKAGE

Statement of Development and Regulatory Policies released by RBI on 27th March 2020 provided for certain regulatory measures to mitigate the burden of debt servicing on account of disruptions caused due to COVID-19. RBI vide its Circular dated 27th March 2020 titled as “COVID-19: Regulatory Package” provided following reliefs in terms of loan repayment:

a)  Grant of moratorium for three months on payment of instalment falling due between 1st March 2020 to 31st May 2020 on term loans and working capital facilities by 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) while interest on the same continuing to accrue.

b)  Moratorium shall not be treated as concession or change in terms and conditions of loan agreements due to financial difficulty of the borrower under RBI Circular dated 7th June 2019. Consequently, such a measure, by itself, shall not result in asset classification downgrade.

Meanwhile after the announcement of moratorium of three months on payment of instalment of term loans and working capital facilities, various writ petitions (in the matter of Anant Raj Limited v/s Yes Bank Limited before Delhi High Court and Transcon Skycity Private Limited & Ors v/s ICICI Bank & Ors before Bombay High Court) on the subject “Whether moratorium period for the amount(s) that became overdue before 1st March 202 is eligible for exclusion from the 90 day's time frame as provided under Prudential Framework?”

To overcome the confusion caused on account of the calculation of moratorium period, RBI came out with a notification on 17th April 2020 titled as “COVID-19 Package - Asset Classification and Provisions” clearly specifying that loan accounts that holds the status of SMA-1/SMA-2 as on 1st March 2020 are only eligible for moratorium period and there status will remain unchanged till 31st May 2020. In other words if an account has already been declared as NPA before 1st March 2020, then such account is outside the ambit of the moratorium provided under relief package.

Considering the ongoing distress on businesses amidst pandemic, RBI further released a Circular on 23rd May 2020 providing extensions to the timelines provided by RBI vide its Circular dated 27th March 2020. Alternatively, in wake of the extension of lockdown and continuing disruption on account of COVID-19, earlier announced moratorium for three months on payment of instalment falling due between 1st March 2020 to 31st May 2020 further stands extended till 31st August 2020 on term loans and working capital facilities by 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) while interest on the same continuing to accrue. So accordingly calculation of time frame for considering an account as a NPA will accordingly vary.