RBI/ Ministry of Finance DIRECTIVES amid COVID-19

During this difficult time of global crises owing to COVID – 19[1] (“C-19”) pandemic, our Government has duly recognized the tough times Indian businesses are facing all over the nation and hence, Reserve Bank of India in consultation with the Government of India, and the Government of India itself has prescribed certain measures in order to liberalize the developmental and regulatory policies applicable on them. These measures are expected to mitigate the numerous disruptions on account of C-19 pandemic and to ensure the continuity of viable businesses.

The measures are discussed as follows:

1.     Extension of realization period of export proceeds

Presently, the value of the goods or software exports made by the exporters is required to be realized fully and repatriated in India within a period of 9 months from the date of exports. 

In view of the disruption caused by the C-19 pandemic, the time period for realization and repatriation of export proceeds for exports made up to or on July 31, 2020, has been extended to 15 months from the date of export. 

The measure will enable the exporters to realise their receipts, especially from C-19 affected countries within the extended period and also provide greater flexibility to the exporters to negotiate future export contracts with buyers abroad.

The Foreign Exchange Management (Export of Goods and Services) Regulations, 2015 has been accordingly amended to incorporate the said relaxation.

2.     Rescheduling of payments – Term loans and working capital facilities

This instruction aims to ease financial stress caused by C-19 pandemic by relaxing repayment pressures and improving access to working capital.  

It provides that in respect of all terms loans[2], all commercial banks[3], co-operative banks, all India financial institutions and NBFCs[4] (collectively “Lending Entities”) are permitted to grant the borrowers a moratorium of 3 months in respect of instalments[5] falling due between March 1, 2020 and May 31, 2020. As a result, the repayment schedule for such loans as also the residual tenor will be shifted by three months after the moratorium period. However, interest shall continue to accrue on the outstanding portion of the term loans during the said moratorium period.

With respect to working capital facilities sanctioned in the form of cash credit/ overdraft, the Lending Entities may defer the recovery of accumulated interest accrued during the moratorium period, immediately after the completion of said period.

The above stated relaxation will not qualify as a default for the purpose of supervisory reporting, and reporting to credit information companies by the Lending Entities.

3.     Ease of working capital financing 

In respect of the working capital facilities[6] sanctioned to the borrowers, Lending Entities are permitted to recalculate the drawing power of the borrowers by reducing the required margins and/ or reassessing their working capital cycle. This measure is available in respect of the borrowers who are facing stress on account of economic fallout amid the C-19 pandemic and will be available till May 31, 2020.  

However, the measure is not absolute and will be dependent upon the Lending Entities satisfying themselves that the same is necessitated following the worldwide catastrophe.

It shall also be noted that such a step shall not be construed as imparting any concession or change in the covenants of the loan agreements due to financial difficulty of the borrower and will not by itself result in asset classification downgrade.

4.     Deferment of interest on working capital financing

On account of the prevailing pandemic situation all round the globe, RBI has permitted Lending Entities to allow the deferment of interest (outstanding as on March 1, 2020) for a period of three months. This relaxation will, to an extent, relieve the borrowers from the immediate fund requirement.

However, the borrowers shall interpret such a step as mere postponement for payment of interest and not the waiver in any manner whatsoever. 

5.     Relaxation in Asset Classification

In line with the relaxation for making the above payments, all the accounts classified as standard (including special mention accounts in case of working capital facilities sanctioned in form of cash credit/ overdraft) as on February 29, 2020, even if overdue, the moratorium period, wherever granted, shall be excluded by the Lending Entities from the number of days past-due for the purpose of asset classification or for determination of out of order status, as the case may be.

6.     Framing policies

Lending Entities are required to frame board approved policies which shall provide for the relaxation prescribed by the RBI in the present circumstances along with its underlying objective. The said policies shall also be disclosed in the public domain.

7.     Developing MIS

In order to have a check on large scale borrowing (exposure of Lending Entity to a borrower is INR 5 crore or more as on March 1, 2020), such entity shall develop an MIS on the reliefs provided to the borrower(s). 

8.     Liquidity Management

With the onset and gradual progression of the C-19 pandemic in India, the sell offs of securities have surged leading to intense redemption pressure in the market. This will inevitably adversely affect the economic activity resulting in increased cash outflows. Thus, in order to mitigate the associated risk, RBI has proposed to conduct auction of the targeted term repos having the prescribed tenor.

The proceeds from the auction shall be deployed in corporate bonds, commercial papers and non-convertible debentures bearing the prescribed investment grade. 

9.     Reduction in Cash Reserve Ratio

Considering the ongoing state of affairs, the banks have been permitted to maintain the cash reserve ratio at 3% (earlier 4%) with effect from March 28, 2020. This measure is anticipated to assist the banks to tide over the disruptions caused by C-19 pandemic.

As per the recent data published by the RBI, this reduction aims to release primary liquidity of appx INR 1,37,000 crore in the banking system. However, the said dispensation is available for a period of one year ending on March 26, 2021.

Further, the requirement of minimum daily CRR balance has been reduced to 80% from previous limit of 90%, which shall be available till June 26,2020.

10.  Deferment of implementation of Net Stable Fund Ratio 

As part of reforms undertaken in the years following the global financial crisis, the Basel Committee on Banking Supervision had introduced the Net Stable Funding Ratio (“NSFR”) which reduces funding risk by requiring banks to fund their activities with sufficiently stable sources of funding over a time horizon of a year in order to mitigate the risk of future funding stress. As per the prescribed timeline, banks in India were required to maintain NSFR of 100% from April 1, 2020. It has now been decided to defer the implementation of NSFR by six months from April 1, 2020 to October 1, 2020.

11.  Relaxation for small account holder

In view of the operational inconvenience in the current scenario, RBI has permitted that the small accounts shall remain operational for the period between April 1, 2020 and June 30, 2020. 

To brief, these small accounts[7] are the saving accounts which are opened by the individual in a banking company where: 

(i)       the aggregate of all credits in a financial year does not exceed INR 1 Lac

(ii)      the aggregate of all withdrawals and transfers in a month does not exceed INR 10,000, and   

(iii)    the balance at any point of time does not exceed INR 50,000.

Provided that this limit on balance shall not be considered while making deposits through government grants, welfare benefits and payment against procurements.

These accounts are initially opened for a period of 12 months, which may be extended for a further period of 12 months subject to the prescribed conditionalities[8]. However, the fulfillment of certain conditions cannot be practically undertaken in the present lockdown situation. Hence, in order to outdo any adverse impact on the operation of these accounts, the said relaxation has been provided.

12.  Postponement of deadline for Legal Entity Identifier

The Legal Entity Identifier (“LEI”) is a 20-character unique identity code assigned to entities who are parties to a financial transaction. This system has been implemented in a phased manner for participants (other than individuals) in the over-the-counter markets for rupee interest rate derivatives, foreign currency derivatives and credit derivatives in India.

Considering the difficulties arising from the outbreak of C-19 and with a view to enabling smoother implementation of the LEI system (Phase III) in non-derivative markets[9], the timeline for implementation of such system in respect of the entities having net worth upto INR 200 crore, has been extended from March 31, 2020 to September 30, 2020.

13.  Remittance to PM-CARES fund

In the wake of outbreak of the C-19 pandemic, RBI has permitted the receipt of foreign inward remittances from non-residents through non-resident exchange houses in favour of the ‘Prime Minister’s Citizen Assistance and Relief in Emergency Situations (PM-CARES) Fund’, subject to the condition that AD Category-I banks shall directly credit the remittances to the Fund and maintain the full details of the remitters.

By issuance of the aforesaid measures, RBI has attempted not only to tackle the existing situation but also paved the way for uninterrupted continuity of the economic activities. 

14.  Declaration of Dividend by banks

In an environment of heightened uncertainty caused by C-19, it is important that banks conserve capital to retain their capacity to support the economy and absorb losses. Hence, the banks shall not make any further dividend payouts from the profits pertaining to the financial year ended March 31, 2020 until further instructions by RBI. This restriction will be reassessed by the RBI based on the financial results of banks for the quarter ending September 30, 2020.

15.  Review of Resolution Timelines on resolution of Stressed Assets

Once a borrower is reported to be in default by any of the lenders (Scheduled Commercial Banks – excluding Regional Rural Banks, All India Term Financial Institutions – NABARD, NHB, EXIM Bank, SIDBI), lenders shall undertake a prima facie review of the borrower account within thirty days from such default. Such Period is referred as Review Period under the Prudential Framework for Resolution of Stressed Assets[10].

Under the COVID-19 Regulatory Package[11], in respect of the accounts of the borrowers which were within the Review Period as on March 1, 2020, the period from March 1, 2020 to May 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 June 1, 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 1, 2020, the timeline for resolution shall get extended by 90 days from the date on which the 180-day period was originally set to expire.  

The lending institutions shall 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 2020 and 2021.

This move of the RBI seeks to press pause button in respect of calculation of Review Period in favour of the borrowers and providing extended timeline for resolution of stressed assets. 

16.  Stringent norms for FDI from neighboring countries

The stricter norms for FDI have been issued by Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, to curb the opportunistic takeovers amid the coronavirus pandemic, which has made the Indian market an easy target for acquisition.

Press note 3 (2020 series)[12] seeks to bring in stricter measures for foreign investment in India. Under the revised framework, any investment in India from the following shall entail Government's approval:

1. Entity based in country, which shares land border with India

2. Beneficial owner of investment is situated or is a citizen of such country. 

Likewise shall be applicable for transfer of ownership of an India entity, directly or indirectly, in favour of the restricted persons mentioned above. 

Previously, only Pakistan and Bangladesh were in such stringent purview. But now, 7 countries[13] are in the mandatory approval zone.

The Ministry of Finance vide notification dated April 22, 2020 has issued Foreign Exchange Management (Non-Debt Instrument) Amendment Rules, 2020 to take effect of the press note 3 of 2020.

Authors: I Abhishek Bansal, Partner ([email protected]) I Laxmi Sinha, Senior Associate ([email protected]) I ACUMEN JURIS I

Practice Areas: I Corporate & Commercial I Acquisitions & Investments I Arbitration & Dispute Resolution I 

Disclaimer- This Article is for information purposes only, and the views stated herein are personal to the author, and shall not be rendered as any legal advice or opinion to any person, and accordingly, no legal opinion shall be rendered by implication.

The Article does not intend to induce any person to omit, commit or act in any particular manner, and that you should seek legal advise before you act on any information or view expressed herein. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of thisNote.

References: 

RBI Notifications

·       COVID19 Regulatory Package - Asset Classification and Provisioning dated April 17, 2020

·       COVID19 Regulatory Package – Review of Resolution Timelines under the Prudential Framework on Resolution of Stressed Assets dated April 17, 2020

·       Declaration of dividends by banks  April 17, 2020

·       Rupee Drawing Arrangement – Remittance to the Prime Minister’s Citizen Assistance and Relief in Emergency Situations (PM-CARES) Fund dated April 03, 2020

·       Amendment to Master Direction (MD) on KYC dated April 01, 2020

·       Export of Goods and Services- Realisation and Repatriation of Export Proceeds-Relaxation dated April 01, 2020

·       Foreign Exchange Management (Export of Goods and Services) (Amendment) Regulations, 2020 dated March 31, 2020

·       COVID-19 – Regulatory Package dated March 27, 2020

·       Legal Entity Identifier: Extension of deadline dated March 27, 2020

·       Statement on Developmental and Regulatory Policies dated March 27, 2020 (Press Release)

Other Authorities/ Ministry’s:

·       Press note 3 (2020 series) dated April 17, 2020 issued by DPIIT, Ministry of Commerce and Industries

·       Prevention of Money Laundering (Maintenance of Records) Amendment Rules, 2020 issued by Department of Revenue, Ministry of Finance;

·       Foreign Exchange Management (Non-Debt Instrument) Amendment Rules, 2020 issued by Ministry of Finance. Vide notification dated April 22, 2020.

[1] The World Health Organization (WHO) has officially named the novel coronavirus disease as pandemic on February, 11, 2020;

[2] Includes agricultural term loans, retail and crop loans;

[3] Includes regional rural banks, small finance banks and local area banks;

[4] Includes housing finance companies;

[5] Includes the following payment falling due from March 1, 2020 to May 31, 2020:

a.     Principal and/or interest components;

b.     Bullet repayments;

c.      Equated monthly instalments;

d.     Credit card dues;

[6] In the form of cash credit/overdraft

[7] Rule 2(fc) of the PML (Maintenance of Records) Rules 2005

[8] Para 23 of Master Direction on Know Your Customer (KYC) Directions, 2016

[9] Non-derivative markets include Government securities markets, money markets (markets for any instrument with a maturity of one year or less) and non-derivative forex markets (transactions that settle on or before the spot date).

[10] Dated June 7, 2019

[11] Dated April 17, 2020

[12] Dated April 17,2020

[13] Pakistan, Bhutan, Myanmar, Nepal, Bangladesh, Afghanistan and China