An Analysis of Covid-19 regulatory package by RBI
The RBI vide circular RBI/2019-20/186 on 27th March 2020 announced specific regulatory measures in order to alleviate the burden of debt servicing caused due to the disruptions caused by the Covid-19 pandemic and to ensure the continuation of a viable business.
As part of the regulatory package by RBI, the Reserve Bank of India has announced to grant a moratorium of three months on payments of all installments due between 1st March 2020 and 31st May 2020.
Which facilities or loans are eligible for benefit under this regulatory package by RBI?
All term loans, including the agricultural term loans, retail loans, crop loans, are eligible in all segments regardless of the segment and tenor of the term loan. All cash credit/overdraft are eligible for benefit under this package, and it is at the disposal of all such accounts which are standard assets as on 1st March 2020.
An overview of this package
The essential elements of this package include the following:
- Deferred installments under the moratorium period shall include following payments due on 1st March 2020- a) Principle and or Interest components b) bullet repayments c) equated monthly installments d) credit card dues.
- In order to avoid paperwork, the facility has been provided across the board to all the borrowers by stretching the repayment of term loan installments by 90 days.
- Rescheduling of principal may be done for a period of three months due between 1st March 2020 and 31st May 2020. For instance, where the last installment of a term loan is due for payment on 1st March 2020, then it will become payable on 1st June 2020. In the case of EMI based term loans, it would be three EMIs due between 1st March 2020 and 31st May 2020, and the tenor shall be extended to three months and must be paid during the extended period. In the case of other term loans, all the installments and the interests will be due during the same period regardless of the tenor of payment that is monthly, quarterly, annually, etc. In the case of term loans, if the repayment has not been commenced, then the interest portion for three months is required to be calculated only.
- The recovery of interest applied to cash credit/overdraft on 31st March 2020, 30th April 2020, and 31st May 2020 is being deferred. Entire interest must also be recovered with interest applied on 30th June 2020 and in a case where monthly interest is not applied, along with the next interest date.
Advantages of the regulatory package by RBI
Following are the benefits of this regulatory package by RBI:
- The fact that this package provides for non-payment of loans/EMIs for three months is a significant relief for people as many people’s earnings were affected due to the pandemic.
- Under normal situation, non-payment or deferment adversely affects the borrower’s credit history, but due to this scheme owing to the non-payment during these three months, there shall be no downgrading of borrowers credit rating and risk classification.
- It won’t affect the existing terms and conditions of the loan.
- The payments rescheduling shall not qualify as default for the purpose of supervisory reporting and reporting to the CICs (Credit Information Companies) by the lending banks.
- There shall be no deduction of EMIs from your bank accounts if you make an application to the banks concerning availing the benefits.
- When it comes to credit card dues, a minimum amount is required to be paid, and in case it’s not paid, it would be reported to the Credit Bureaus. However, under this package, the over dues in the credit card account do not get reported for a period of three months.
Disadvantages of the regulatory package by RBI
The disadvantages of this package include:
- Although the interest on loans is not mandatorily payable immediately and gets postponed by three months, it continues to accrue on the account, which results in higher costs.
- Lack of communication on the part of lending banks or institutions on the moratorium regarding how will it be offered and the charges for it etc. may result in non-clarity.
Is the Moratorium, provided under the regulatory package by RBI, applicable to NBFCs?
There seems to be some uncertainty regarding the application of this regulatory package to the loan facilities availed by NBFCs and shadow banking institutions from scheduled commercial banks. It may be noted that the Indian Banks Association and the Reserve Bank of India released their FAQs on 1st April 2020, wherein it was stated that although the moratorium on term loans is available to all borrowers including the NBFCs, the working capital loans extended to the NBFCs will not be eligible.
Moreover, the State Bank of India, in its FAQs, stated that none of the NBFCs, MFIs, and other financial institutions is eligible for the moratorium, and they may be offered funding under the targeted long term repo operations in case of any cash flow issues.
The regulatory package by RBI comes as a huge sigh of relief for the middle-class and for the poor people who may not be able to repay loans given the gravity of the present situation where most of them have not received income. This package has been lauded by many considering the extent to which it may defer the financial woes of the borrowers; however, the ambiguity in the package has caused conflicting interpretations, thereby creating more confusion.