Measures Deployed by the RBI to Tackle COVID-19 Pandemic
In the wake of the ongoing Covid-19 pandemic, several measures have been recently taken by the Reserve Bank of India (“RBI”) to ease the burden on retail as well as institutional players in the Indian market. The RBI had recently announced a Covid-19 – Regulatory Package on March 27, 2020 (“Regulatory Package”), whereby lenders across India were inter alia permitted to grant a moratorium of three months upon payment of all installments that were due to fall between March 1st, 2020 and May 31st, 2020 (“Moratorium Period”).
Some of the measures under the Regulatory Package were as follows:
- Rescheduling of Payments – Term Loans and Working Capital Facilities
- As regards all term loans, a moratorium of three months on payment of all installments falling due between March 1, 2020, and May 31, 2020, has been allowed by the RBI to be granted by all commercial banks (including regional rural banks, small finance banks, and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies) (“lending institutions”) to their customers. The RBI further allowed for the shift in the repayment schedule along with the residual tenor for such loans by three months after the moratorium period. The interest, however, on such loans is to continue to accrue on the term loan on its outstanding portion during this moratorium period.
- The RBI further allowed the lending institutions to defer the recovery of any applicable interest in respect of working capital facilities sanctioned during the period from March 1, 2020, up to May 31st, 2020 in respect of working capital facilities sanctioned by way of cash credit/overdraft limits (“CC/OD”). The accumulated accrued interest is to be recovered immediately after the completion of this period.
- Easing of Working Capital Financing
- Further lending institutions have been asked to recalculate their respective ‘drawing power’ by reassessing the working capital cycle and/or by reducing their margins in respect of Cash Credit/ Overdraft (“CC/OD”) facilities to their borrowers facing stress on account of Covid-19. This relief is to be made available up to May 31, 2020.
- Classification as Special Mention Account (SMA) and Non-Performing Asset (NPA).
- The moratorium/deferment/recalculation of the ‘drawing power’ is not to be treated as a change or concession in the terms and conditions of loan agreements due to the financial difficulty of the borrower. Therefore, such a measure, by itself, is not to result in any downgrade in asset classification.
- In respect of term loans which are granted relief as per paragraph (i)a. above, their asset classification would be derived based on any revision in due dates and any revision of their respective repayment schedule. Similarly, the SMA and the out-of-order status would be evaluated based on the application of accrued interest immediately post the completion of the deferment period as well as the revised terms, as permitted in terms of paragraph (ii) a. above in case of working capital facilities where relief is provided as per paragraph (i)b. above.
- To report to Credit Information Companies (CICs) and supervisory reporting by lending institutions, the rescheduling of payments, including interest, will not qualify as a default. The RBI has asked the CICs to ensure that the actions taken by such institutions following the above notifications do not have any adverse impact on the credit history of the beneficiaries.
- Other Conditions
- Boards of all lending institutions have been requested to frame approved policies for providing the aforementioned reliefs to all eligible borrowers, including the criteria for considering reliefs under paragraph (ii)a. above and for that information to be disclosed in the public domain.
- The banks are required to develop an MIS on the reliefs provided to their borrowers in all such cases where the exposure of a lending institution to a borrower is ₹ 5 crores or above as of March 1, 2020.
These measures were followed post the statement (“Governor's Statement”) made by the Governor on April 17, 2020, and a slew of other notifications whereby the RBI introduced measures in addition to the Regulatory Package which primarily aimed at:
- maintaining adequate liquidity in the system and its constituents in the face of Covid-19-related dislocations,
- facilitating and incentivizing bank credit flows, easing financial stress, and
- enabling the normal functioning of markets.
The following additional measures have been introduced by the RBI aimed at liquidity management under the Governor’s Statement:
Liquidity Management Measures under the Governor’s Statement
- TLTRO: RBI has decided to conduct targeted long-term repo operations (“TLTRO 2.0”) at the policy repo rate for tenors up to three years for an aggregate amount of INR 50,000 crore (approx. USD 6500 million), to begin with, in tranches of appropriate sizes.
The funds availed under TLTRO 2.0 shall be deployed in investment-grade bonds, commercial paper, and non-convertible debentures of non-banking financial companies (“NBFCs”), with at least 50 percent of the total funds availed shall be apportioned as below:
- 10 percent in securities/instruments issued by Micro Finance Institutions (MFIs).
- 15 percent in securities/instruments issued by NBFCs with asset size of INR 500 crores and below;
- 25 percent in securities/instruments issued by NBFCs with assets size between INR 500 crores and INR 5000 crore.
These investments made by banks would be classified as held to maturity (“HTM”) even over 25 percent of the total investment permitted to be included in the HTM portfolio. Exposures under this framework have also not been deemed under the large exposure framework (“LEF”). The time limit for the deployment of funds availed under this facility is 30 days from the date of operation. Banks would need to submit a declaration to this effect to the Financial Markets Operations Department and to the Department of Supervision within one month of availing of these facilities.
- Refinancing Facilities for All India Financial Institutions (“AIFIs”): The RBI has decided to provide special refinance facilities for a total amount of INR 50,000 crore (approx. $6500 million) to the National Bank for Agriculture and Rural Development (“NABARD”), Small Industrial Development Bank of India (“SIDBI”) and to National Housing Bank (”NHB”) to enable them to meet sectoral credit needs. The amount so allocated will comprise of: (i) ₹ 25,000 crores (approx. $ 3250 million) allocated to NABARD for refinancing regional rural banks (“RRBs”), cooperative banks, and MFIs; (ii) ₹15,000 crores to SIDBI (approx. $2000 million) for on-lending/refinancing; and (iii) ₹10,000 crores (approx. $ 1300 million) to NHB for supporting housing finance companies (“HFCs”). Advances under this facility are to be charged at RBI’s extant policy repo rate at the time of availing these facilities.
- Fixed-Rate Reverse Repo Rate: The RBI has further reduced the fixed-rate reverse repo rate under the liquidity adjustment facility (“LAF”) to 3.75 percent from 4.0 percent by 25 basis points. The policy repo rate remains unchanged at 4.40 percent, and the marginal standing facility rate and the bank rate remain unchanged at 4.65 percent; all the other terms and conditions of the LAF are to remain unchanged.
- Ways and Means Advances (“WMA”) for States: On April 1, 2020, the RBI announced an increase to the in WMA limit of the states by 30 percent. This WMA limit for states as well as for Union Territories has now been increased by 60 percent over and above the level as of March 31, 2020, and shall be available for utilization till September 30, 2020.
RBI had further announced the following regulatory measures in addition to the liquidity management measures under the Governor’s Statement.
Regulatory Measures under the Governor’s Statement
(i) Asset Classification: There would be an asset classification standstill during the Moratorium Period, i.e. the 90-day non-performing asset (NPA) norm shall not include the moratorium period for all such accounts for which lending institutions decide to grant moratorium or deferment. This applies to accounts which were standard as of March 1st, 2020.
There is also a requirement for banks to now maintain sufficient buffers and remain adequately provisioned to meet future challenges. Banks would be required to maintain a higher provision of 10 percent spread over two quarters (March 2020 and June 2020) on all such accounts, under the standstill.
(ii) Extension of Resolution Timeline: The RBI has further decided that the time period for implementing a resolution plan would be extended by an additional 90 days from the earlier time frame of 210 days from the date of default in case of large accounts under default, Scheduled Commercial Banks, AIFIs, Non-Deposit taking Systemically Important NBFCs and Deposit-taking NBFCs under the RBI's prudential framework of resolution of stressed assets dated June 7, 2019, (“Prudential Framework”).
(iii) Distribution of Dividend: No further dividend pay-outs from profits pertaining to the financial year ending on March 31, 2020, by Scheduled commercial banks and cooperative banks. This restriction shall be subject to future review based on the financial position of banks for the quarter ending September 30, 2020.
(iv) Liquidity Coverage Ratio (“LCR”): The LCR requirement for Scheduled Commercial Banks has been brought down from 100 percent to 80 percent with immediate effect. The requirement will be gradually restored back in two phases: 90 percent by October 1, 2020, and 100 percent by April 1, 2021.
(v) NBFC Loans to Commercial Real Estate Projects: In respect of loans to commercial real estate projects by NBFCs, the date for commencement for commercial operations (DCCO), can be extended by an additional one year without being treated the same as restructuring, if delayed for reasons beyond the control of promoters.
Post the introduction of the Regulatory Package and the Governor’s Statement, the RBI has further introduced the following changes to its policies for the year 2020:
- Interest Subvention (“IS”) and Prompt Repayment Incentive (“PRI”) for Short Term Crop Loans during the years 2018-19 and 2019-20: Extended Period on account of Covid-19 .
- In respect of all term loans including short-term crop loans, a moratorium has been granted for three months on payment of installments that are to fall due in the Moratorium Period.
- For short-term crop loans up to INR 3 lakh per farmer which have become due for repayment between March 01, 2020, and May 31, 2020, continued availability of 2% IS and 3% PRI has been provided to such farmers for an extended period of repayment of up to 31.05.2020 or the date of repayment, whichever is earlier.
- INR 50,000 crore Special Liquidity Facility for Mutual Funds (SLF-MF).
- The RBI has decided to open a special liquidity facility for mutual funds for INR 50,000 crore.
- Under the SLF-MF, the RBI shall conduct repo operations of 90 days tenor at the fixed repo rate. The scheme was made available from April 27th, 2020 up till May 11th, 2020, or up to the allocated amount utilization, whichever is earlier.
- Banks shall use the funds availed under the SLF-MF exclusively for meeting the liquidity requirements of MFs by (1) loans offering, and (2) outright purchase of and/or repos against the collateral of investment-grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (“CDs”) held by MFs.
- Liquidity support availed under the SLF-MF would be eligible to be classified as HTM even if over 25 percent of total investment is permitted to be included in the HTM portfolio. Exposures under this facility will not be reckoned under the LEF. The face value of securities acquired under the SLF-MF and kept in the HTM category will not be reckoned for computation of adjusted non-food bank credit (“ANBC”) to determine priority sector targets/sub-targets. Support extended to MFs under the SLF-MF shall be exempted from banks’ capital market exposure limits.
- LAF-eligible banks shall be allowed to use this special repo window against eligible collateral and this facility can only be availed for on-lending to Mutual funds.
- The eligible collateral and the applicable haircuts to remain the same as applicable for LAF.
- While the minimum tenor of the repo with RBI will be for three months, banks have been given the option to fix the tenor of lending to/repo with MFs.
-  RBI/2019-20/186 DOR.No.BP.BC.47/21.04.048/2019-20
-  https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=3853
-  Press Release: 2019-2020/2237
-  RBI/2019-2020/215 FMOD.MAOG.No.141/01.01.001/2019-20
-  Press Release: 2019-2020/2233
-  RBI/2019-20/224 FIDD.CO.FSD.BC.No.24/05.02.001/2019-20
-  Press Release: 2019-2020/2276
Contributed By - Archesh Tiwari
Designation - Principal Associate