Relief Measures by RBI to borrowers during COVID-19 crisis
Due to economic fallout during lock down period for COVID-19, the Reserve Bank of India has come up with much awaited relief measures to help the borrowers during this challenging times. The following is a summary of these measures.
- Moratorium for Term Loans
In the RBI notification dated 27-03-2020 the following is provided.
“All commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all India financial institutions, NBFCs (including housing finance companies and micro finance institutions) are being permitted to allow a moratorium period of 3 months on payment of instalments in respect of all term loans outstanding as on 01-03-2020. Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, may be shifted across the board by three months.”
This is a major relief granted to borrowers during this period of economic crisis where the RBI has allowed all banks and financial institutions to allow a moratorium period of 3 months. This means that banks can shift the EMIs which are falling due from 01-03-2020 to 31-05-2020. The original tenure of term loan will get increased by 3 months and no EMI will be debited during this moratorium period.
However, for implementation of this direction of the RBI, every bank and financial institution will form their own policy measures and let’s see what they offer. Ideally, all the EMIs should be automatically deferred by 3 months and EMI ECS should not hit the borrowers account during this deferment period. But this will depend on decisions taken by different banks and financial institutions in this regard.
Please note that under this clause the credit card instalments falling due during this respective period is also covered.
- Deferment of interest on working capital facilities
As per RBI’s notification dated 27-03-2020 the following is stated.
“In respect of working capital facilities sanctioned in the form of cash credit / overdraft, lending institutions are being permitted to allow a deferment of 3 months on payment of interest in respect of all such facilities outstanding as on 01-03-2020. The accumulated interest for this period will be paid after the expiry of the deferment period. “
“In respect of above 2 points, the moratorium / deferment is being provided specifically to enable the borrowers to tide over the economic fallout of COVID-19. Hence, the same will not be treated as change in terms and conditions of the loan agreements due to financial difficulty or the borrowers and consequently, will not result in asset classification downgrade. The lending institutions may accordingly put in place a Board approved policy in this regard.”
Thus as clear from above, the interest payment of cash credit limit and over draft limits have been deferred for 3 months. No interest will be debited during these 3 months on cash credit and overdraft accounts. However, please note that interest payment is only deferred not waived. The accumulated interest of the 3 months will be debited from account collectively after this period of 3 months.
RBI has directed banks to design Board approved policy with regard to both term loan moratorium and interest deferment on working capital financing.
However, RBI is silent on working capital financing availed by the borrowers by way of foreign and inland letter of credit. Relief in this regard is also needed by the industry in this desperate times of economic crisis.
- Easing of Working Capital Financing
As per RBI notification dated 27-03-2020 it has been provided that
“In respect of working capital facilities sanctioned in the form of cash credit / overdraft, lending institutions may recalculate drawing power by reducing margins and/or by reassessing the working capital cycle for the borrowers. Such changes in credit terms permitted to the borrowers to specifically tide over the economic fallout from COVID-19 will not be treated as concessions granted due to financial difficulties or the borrower, and consequently, will not result in asset classification downgrade.”
The banks may reassess the working capital requirements of the borrowers during this period of economic crisis and review the terms and conditions of working capital finance facilities.
The above 3 reliefs provided by banks as per directions of RBI will not be considered as default in payment of EMI or interest. This will not result in downgrading of loan as NPA. Also, due to this relief, the credit history of the borrower will not get impacted. In common terms it can be said the CIBIL score will not get effected due to this non-payment of EMI or interest.
The above are much awaited welcome measures provided by the RBI to the borrowers to take care of their genuine concerns during this period of economic crisis. But how the banks will implement these measures, only time will tell.
Amit Mundhra FCA
The author is a member of ICAI and he can be reached at firstname.lastname@example.org