RBI extends loan moratorium till Aug 31, silent on one-time restructuring

4 days ago

The central bank has increased group exposure limits of lenders from 25% to 30%

Reserve Bank of India | RBI meeting | repo rate

In a bid to provide relief to borrowers at a time when they are struggling with their cash flows, the Reserve Bank of India (RBI) has extended the moratorium on payment of installments for all term loans by another three months till August end. It has also extended the deferment of interest payment on working capital loans for three months more till August 31.

The RBI had, on March 27, provided a three-month moratorium on term loans and working capital borrowings, which was to be in effect from March 1 to May 31. This facility now stands extended till August 31.

On Friday, RBI governor Shaktikanta Das said, in view of the extension of the lockdown and continuing disruptions on account of covid-19, the moratorium is being extended by another three months from June 1, till August 31, taking the total period of applicability of the measures to six months (i.e. from March 1 to August 31).

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Corporates and businesses had expressed concerns that while the deferment of interest payment on working capital loans will lend a helping hand to them, the fact that they have to pay the deferred interest at one shot as soon as the moratorium ends at a time when cash flows have been impacted due to the prevailing economic conditions, will prove to be a bummer for them.

Addressing those concerns, the RBI has asked lenders to convert the accumulated interest on working capital facilities over the deferment period (up to August 31) into a funded interest term loan which shall be repayable not later than the end of the current financial year (March 31, 2021).

The RBI has further said rescheduling of payments on account of the moratorium/deferment will not qualify as a default for the purposes of supervisory reporting and reporting to credit information companies (CICs) by the lending institutions. The central bank has said that there will be a standstill in asset classification for all accounts, which are standard as of March, 2020 and opted for a moratorium from March 1 to August 31.

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Several banks through the Indian Banks Association had approached the RBI to increase the period of moratorium till August end and the RBI obliged to the requests of the bank. Bankers had also reached out to the RBI for a one-time restructuring of loans given the concerns of borrowers go beyond liquidity and include viability and the capacity to change as well as survive in different business environments, in the post-Covid world.

State Bank of India Chairman Rajnish Kumar said, currently around 20 per cent of the banks’ customers have availed off the moratorium facility. Customers are seeking moratorium not just for cash flow issues but also to preserve cash. The IBA had requested for an extension in moratorium because when the moratorium was initially announced by RBI in March, nobody had expected that the lockdown will be extended for such a long period, he added.

SS Mallikarjuna Rao, Managing Director and chief executive, Punjab National Bank said moratorium extension was expected. It looks sufficient at this point of time.

Big lenders such as Axis Bank has around 25-28 per cent of its loan book under moratorium as of April, while for ICICI Bank, about 32 per cent of the bank’s customers by value, both retail and corporate is under moratorium. As of April end, Kotak Mahindra Bank has approximately 26 per cent of borrowers by value at account level have opted for the moratorium. Bandhan Bank reported 71 per cent of its loan by value under moratorium.

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On one-time restructuring, Kumar said, restructuring is required when enterprises have incurred losses. Right now the moratorium takes cares of the situation around the cashflow disruptions. And if someone needs restructuring after August 31 then banks have to deal with it. We should not be obsessed with one-time restructuring at this point in time when we still have time upto August 31 on how the various sectors of the economy respond post the lockdown is lifted.

Rao said, restructuring is very much a need but without understanding cash flows, that exercise will not serve purpose. Banks will be in better position to understand need for restructuring after lockdown in over in August 2020. In second half banks will be better position to make assessment if non-performing assets and capital requirements.

On the issue of moratorium to NBFCs, Kumar said, NBFCs, HFCs requirement for funds would depend on their outflow and banks will extend moratorium on a case to case basis. He said, there are enough government and RBI measures to support them.

In the past, banks have been hesitant in extending the moratorium facility to NBFCs and only a few have extended moratorium to NBFCs on the loans they have availed from banks.

Hardika Shah, Founder & CEO Kinara Capital said, “Clear guidelines on the applicability to NBFCs are still missing which will impact cash flow. The Moratorium could be effective if it is also extended to the NBFCs. However, clarity on this from the RBI is still lacking”.

Furthermore, RBI has relaxed its guidelines under the large exposures framework and as a one-time measure has increased the group exposure limits for banks to 30 per cent from 25 per cent earlier, which will be valid till June 30,2021. This was done keeping in mind the fact that, many corporates are finding it difficult to raise funds from the capital market and are predominantly dependent on funding from banks.

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The central bank has also relaxed provisioning norms for lenders in case of large accounts which have defaulted and no resolution plan has been implemented even after 210 days and given an extension for resolution of such assets. RBI has permitted banks to exclude the moratorium period (March1 to August 31) from the calculation of 30-day review period or 180-day resolution period, if the review/resolution period had not expired as on March 1, 2020.

The RBI has asked lending institutions to “recalculate their drawing power” in case of working capital loans by reducing their margins till August 31. But they can restore their margins to the original levels by March 31,2021. Further, lending institutions have been permitted to reassess the working capital cycle of a borrowing entity up to an extended period till March 31, 2021. This will provide necessary leeway to the lenders to make an informed assessment about the impact of the pandemic on the entity concerned and will not result in asset classification downgrade, the RBI said.

In respect of working capital facilities sanctioned in the form of cash credit/overdraft, lending institutions are permitted to recalculate the ‘drawing power’ by reducing the margins till the extended period, i.e., August 31, 2020. In order to smoothen the impact for the borrowers, lending institutions are permitted to restore the margins to the original levels by March 31, 2021.

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