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An analysis of reliefs by RBI to banks and borrowers for COVID-19

Dipesh Shah 
on 30 April 2020

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In the latest global pandemics era of the COVID 19 crisis, the Indian government is taking its all the ways and means to provide enough reliefs to the citizens. Reserve Bank of India has issued required circulars giving relief on March 27, 2020 and April 17, 2020. Let us check the implications of it.

Relief of moratorium on new dues

With the notification issued by the Reserve Bank of India on March 27,2020 the loan accounts have been shifted for three months, giving them relief in installments and interest deferment in March, April and May 2020. It only mentions relief for arising new dues during these three months. The interest for a period of three months has to be paid later on after completion of the moratorium period i.e. the installments and interest have not been waived, only the loan term has been postponed for three months and loan accounts got extended beyond three months. So that there is no obligation to pay this amount during the lockdown period. However, those who have the capacity and enough cash flow power should repay the loan regularly without insisting on such relief so that the total interest burden is reduced and future debt is reduced. In addition, CC OD account holders have been given the benefit of interest deferral during this period and banks have been allowed to determine the drawing power by reducing margins. In the first version of the said circular, SCB/DCCB were not included which was ractified by the revised circular on the same day. The Reserve Bank of India has instructed that the above benefit should be considered as a special exemption and not the restructuring and therefore the asset should not be downgraded due to the benefit of the moratorium. Although the circular provided relief only for installments and interest due to new dues, many citizens and many financial organizations misinterpreted it and created the misconception that earlier overdue loans eligible for becoming NPAs were also relieved during this period. In the context of the above view, we have to spell out the wordings used in the notification issued by RBI on March 27,2020 circular no. DOR.No.BP.BC.47/21.04.048/2019-20. The para 2 clearly defines as "In respect of all term loans all commercial banks are permitted to grant a moratorium of three months on payment of installments falling due between March 1,2020 and May 31, 2020. Here, in footnote the installment is clearly defined as "Installment will include the following payments falling due between March 1, 2020 to May 31, 2020.(i) Principal and/ or interest components (ii) bullet repayments (iii) equated monthly installments (iv) credit card dues." From above wordings it is very much clear concept that payments falling due during the given period only get the benefit of the moratorium. In the same way para 3 of the said circular gives benefit to the interest portion of working capital facilities. Para 5 defines that such measure of moratorium/deferment/recalculation of drawing power is given only because of covid 19, it shall not result in asset downgrade. Here, asset downgrade is only meant for the benefits given as per para 2 and 3 to the new dues falling during the given period and not for all the overdues of the previous period. That is again defined in para 6 of the said circular. Here, please find the link of the official press release from the Press Information Bureau, Government of India, Ministry of Finance dated 01 April 2020.

Press Release

In the above press release the FAQ related said circulars are given. In the answer of question no 14, it is clearly stated that "The measures stipulated by RBI under the March 27, 2020 circular on Covid 19 regulatory package will not be treated as restructuring and hence will not result in asset classification downgrade". So, we can conclude that the said circular was silent on new NPA classification for old overdues/past dues. Generally, when such relaxations regarding NPA are given, RBI puts the condition of additional provisions as recently they have asked for additional provisions on restructure of MSME loans. And in the circular dated March 27, 2020 there was no mention regarding additional provisions as they have not touched the past dues but only new dues falling between March 1, 2020 to May 31, 2020. So, this relief measure could not bring a smile on the face of the bankers as borrowers were benefited but the lending institutions were facing question mark against the recovery of past dues resulting into huge increase in NPA and decrease in cash flow due to moratorium on new dues.

Relief for asset classification of past dues

However, the speech given by the Governor of the Reserve Bank of India Shree Shashikant Das on April 17, 2020 stated

"16. Economic activity has come to a standstill during the period of the lockdown, with consequential lingering effects which have unambiguously affected the cash flows of households and businesses. On March 27, 2020 the RBI had permitted lending institutions (LIs) to grant a moratorium of three months on payment of current dues falling between March 1 and May 31, 2020. It is recognized that the onset of COVID-19 has also exacerbated the challenges for such borrowers even to honour their commitments fallen due on or before February 29, 2020 in Standard Accounts. The Basel Committee on Banking Supervision (BCBS) has taken cognizance of the financial and economic impact of COVID-19 and very recently announced that"………. the payment moratorium periods (Public or granted by banks on a voluntary basis) relating to the COVID19 outbreak can be excluded by banks from the number of days past due” in respect of NPA recognition.

An analysis of reliefs by RBI to banks and borrowers for COVID-19

17. Therefore, it has been decided that in respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day NPA norm shall exclude the moratorium period, i.e., there would an asset classification standstill for all such accounts from March 1, 2020 to May 31, 2020. NBFCs, which are required to comply with Indian Accounting Standards (IndAS), may be guided by the guidelines duly approved by their boards and as per advisories of the Institute of Chartered Accountants of India (ICAI) in recognition of impairments. In other words, NBFCs have flexibility under the prescribed accounting standards to consider such relief to their borrowers.

18. At the same time, we are cognizant of the risk build-up in banks' balance sheets on account of firm-level stress and delays in recoveries. With the objective of ensuring that banks maintain sufficient buffers and remain adequately provisioned to meet future challenges, they will have to maintain higher provision of 10 per cent on all such accounts under the standstill, spread over two quarters, i.e., March, 2020 and June, 2020. These provisions can be adjusted later on against the provisioning requirements for actual slippages in such accounts."

In para 16 of the speech it is clearly spell out that on March 27, 2020 the benefits given for current dues and on April 17 it is decided to pass on the moratorium benefit on past dues also for easing the payment burden of overdues.

And the notification circular no DOR.No.BP.BC.63/21.04.048/2020-21 issued by RBI on the same day has also given relief to the standard overdue loans which were not classified as NPA before 1 March 2020. These Loans will not be taken into NPAs between March, April and May 2020, i.e. such special mention accounts as NPAs in March, April and May have been standstill for the time of moratorium. In para 2 of the said circular again it is clearly spell out that in the circular dated March 27, 2020 the moratorium benefit was given to the dues falling between March 1, 2020 and May 31, 2020. And now as per the clarification from Basel committee it is also made applicable on past due for asset classification purpose. It has been instructed to make additional provision of 10% on the outstanding amount of such loan accounts. This means that if these accounts were classified as NPAs, the co-operative bank would have to make a provision of 10% and the commercial bank will have to make a provision of 15% as a sub-standard on it. The same provision has to be made separately by 10%. We can interpret that the financial institutions are not given relief for provision perspective. According to one estimate, the additional provision will erode the total banking industry by about Rs 35,000 crore, which will adversely affect the bank's profitability. But it can be said that the account holder escaped from being classified as NPA during this lockdown and moratorium period. The lending institutions have to keep proper records of such all benefits measures and to be published in the notes on accounts also. The exclusions permitted are to be reckoned in supervisory reporting as well as CIC data reporting i.e. the days of past due and SMA status wherever applicable will remain unchanged till May 31, 2020. For the exposure to the borrower is Rs 5 crore and above, MIS to be made more strengthened by borrower wise and by facility wise reliefs for reporting purposes. Also it is worth mentioning that the moratorium reliefs are to be well defined and described into the Board approved policy and be made available in public domain. Also, properly communicated down to the respective staff members for implementation.

 

Conservation of capital

In the difficult times of this global epidemic, businesses and the country's economy will naturally be adversely affected and financial institutions will have to be prepared to suffer the negative consequences. In an environment of heightened uncertainty caused by COVID-19, it is important that banks conserve capital to retain their capacity to support the economy and absorb losses. Therefore, the general permission given by the Reserve Bank of India to the banks to distribute dividends has been revoked by a circular no.DOR.BP.BC.No.64/21.02.067/2020-21 dated April 17,2020 with the intention of increasing the ability to bear future losses if there is sufficient capital at that time by not making dividend payouts from the profits of the Financial year 2019-20. Here also, in the first version of the said circular, they have said that no bank will declare or make any further payouts of the dividends from the profit of the financial year 2019-20. Later on in the revised version on the same day, they put restrictions on making payouts of the dividends. Here we can understand that if the payouts is not to be done, why should be done declaration for probable dividends which are not going to be payouts. Here in the said circular the first para describes the general permission given to declare dividend which clearly indicates that the whole circular is meant for withdrawal of general permission till further instructions. This restriction will be reassessed on the basis of the comprehensive results of the banks for September 2020. But all we know that the forthcoming time is going to be worse for the business cycle and the results of the next three or four quarters are going to be worse. Well established AMC has recently wind up its six fixed income debt schemes as it believes that the market will not show normal come back and will not return to normalcy soon. In this stressful era, the bank should build a general reserve using dividends payable from the profits for the year 2019-20, i.e. all the amount eligible to be distributed to the original owner shareholder of the bank should be kept with the bank itself as a General Reserve, which secures the bank's future and strengthens it to survive in the difficult economic situation of probable losses. At present the business is closed and there is no indication as to when the business vehicle will be back on track. Naturally, due to weak business, the NPAs of banks may increase in the future, which could have serious effects on the economy and the financial position of the banks suddenly deteriorates. The country's economy has seen a glimpse of such a situation in the recent past. Therefore, the vision of the Government and the Reserve Bank of India to restrict the payout of dividends and to set up a General Reserve following the principle of plough back of profit without distributing or utilizing the existing profits for future use is truly unique and admirable. Dividends payable in the co-operative credit structure under section 68 of the Gujarat Cooperative Societies Act are subject to the guidelines of the Reserve Bank of India and commercial banks are already under control of the Reserve Bank of India. The war is always won by timely use of the weapons in the right directions.

 

Right steps at right time

It is a well-known fact that it is not enough for plans and actions to be in the right direction, but the right steps taken at the right time are better than expected. Due to such correct and directional measures, the impact of epidemic disease in our country is very small, it can be considered insignificant compared to other rich countries. And in the same way, from an economic point of view, there is no doubt that our country will emerge as a global leader with such quick and far-sighted steps. We all have a deep faith that if the present difficult time is spent in peace, samadhi and patience, then the rising sun will rain rays of happiness and prosperity.

The views are personal and the readers are requested to refer original circulars for interpretation. The author and/or publisher will not be liable for any legal consequences.


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