Last week, the Reserve Bank of India announced a three-month moratorium on all term loans outstanding as on March 1, 2020, as well as on working capital facilities, as part of its measures to strengthen the financial system against the economic fallout of COVID-19 disease. In response to the central bank’s prodding, many public sector lenders, including the likes of State Bank of India, Punjab National Bank, Bank of Baroda, Canara Bank, Oriental Bank of Commerce and Indian Bank decided to allow their term loan borrowers to delay their EMIs due between March 1 and May 31. The Indian Banks Association has now published a list Frequently Asked Questions (FAQs) about the technicalities of the moratorium.
Reserve Bank of India has announced certain regulatory measures to mitigate the burden of debt servicing brought about by disruptions on account of Covid-19 pandemic and to ensure the continuity of viable businesses. It was felt that there may be a temporary disruption in the cash flows, and in some cases loss of income, for the businesses/ individuals and the present measures work to bring relief to those businesses / individuals.
Which are the facilities eligible for availing the benefits under the RBI Covid- 19 regulatory package and whether the facility is extended across the board to all borrowers?
All term loans (including agricultural term loans, retail, crop loans and loans under Pool Purchases) and cash credit/overdraft are eligible to avail the benefits under the package. This is available to all such accounts, which are standard assets as on 1st March 2020. Further, to avoid unnecessary paperwork the facility has been extended across the board to all the borrowers by extending repayment of term loan instalments (includes interest) by 90 days. The original repayment period for term loans will get extended by 90 days e.g. a loan repayable in 60 instalments maturing on 1st March 2025 will mature on 1st June 2025.
Is rescheduling of payments applicable for all kinds of term loans?
It is applicable for all term loans in all the segments, irrespective of the segment and the tenor of the term loans.
Is rescheduling of term loans only for principal amount or it also includes interest?
Rescheduling of principal can be done for a period of three months falling due between March 1, 2020 and May 31, 2020. For example, where the last instalment of a term loan falls due for payment of on say 1st March 2020, it will become payable on 1st June 2020.
For EMI based term loans, it will be three EMIs falling due between 1st March 2020 and May 31st, 2020 and the tenor will be extended by three months and have to be repaid during the extended period, as per the example under (2) above.
For other term loans, it will be all the instalments and Interest falling due during the same period, irrespective of the tenor of payment i.e. monthly, quarterly, half yearly, annually, bullet payment etc. For term loans, where the repayment has not commenced, the interest portion for three months alone needs to be reckoned.
What happens if the extended tenor of term loan goes beyond the maximum period stipulated for a product or as stipulated in the loan policy?
This can be extended for all such term loans without the need for seeking deviations or approvals.
What will be the treatment of interest on the working capital facilities?
The recovery of Interest applied to cash credit/overdraft on 31st March, 30th April and 31st May 2020 is being ‘deferred’. However, the entire interest must be recovered along with the interest being applied on 30th June 2020 and in cases, where monthly interest is not being applied, along with the next interest date.
What will be the impact of this relief by RBI on borrowers as far as reporting of default is concerned?
Any delay in payment leads to default and gets reported to Credit Bureaus. For business loans of Rs. 5 Crores and above, the banks report the overdue position to RBI also through CRILC. As a result of this relief package, the overdue payments post 1st March 2020 will not be reported to Credit Bureaus/ CRILC for three months. No penal interest or charges will be payable to the banks. Similarly, SEBI has allowed that Credit Rating Agencies (CRAs) may not consider the delay as default by listed companies if the same is owing to lockdown conditions arising due to Covid-19.
That means businesses/ Individuals should necessarily take the benefit?
You may take the benefits under this package if there is a disruption in your cash flows or there is loss of income. However, you must take into account that the interest on the loans, though not mandatorily payable immediately and gets postponed by 3 months, continues to accrue on your account and results in higher cost.
To give you a perspective, suppose your loan outstanding is Rs 100,000 and you are charged 12 percent rate of interest on your loans, then every month you are liable to pay Rs. 1000 as interest. In case you opt not to service the interest every month, you are liable to pay interest at 12 percent p.a. and accordingly you will pay Rs. 3030.10 at the end of 3rd month.
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