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4/17/2020 The Great Lockdown: Standstill on asset classification – Vinod Kothari Consultants

The Great Lockdown: Standstill on


asset classification
April 17, 2020 / 0 Comments / in Covid-19, Financial Services, Financial
services/ NBFCs/Fin-tech - Covid-19, RBI, UPDATES / by Staff
Publication

– RBI Governor’s Statement settles an unwarranted confusion


Timothy Lopes, Executive, Vinod Kothari Consultants

finserv@vinodkothari.com

Background
In the wake of the disruption caused by the global pandemic,
now called ominously called pitted against the Great
Depression of 1930s and hence called The Great
Lockdown[1], several countries have taken measures to try
and provide stimulus packages to mitigate the impact of
COVID-19[2]. Several countries, including India, provided or
permitted financial institutions to grant ‘moratorium’, ‘loan
modification’ or ‘forbearance’ on scheduled payments of their
loan obligations being impacted by the financial hardship
caused by the pandemic.

The RBI had announced the COVID-19 Regulatory


Package[3]on 27th March, 2020. This package permitted
banks and other financial institutions to grant moratorium up
to 3 months beginning from 1st March, 2020. We have
covered this elaborately in form of FAQs.[4]

However, there was ambiguity on the ageing provisions


during the period of moratorium. That is to say, if an account
had a default on 29th February, 2020, whether the said account
would continue to age in terms of days past due (DPD) as
being in default even during the period of moratorium. Our
view was strongly that a moratorium on current payment
obligation, while at the same time expecting the borrower to
continue to service past obligations, was completely illogical.
Such a view also came from a judicial proceeding in the case
of Anant Raj Limited Vs. Yes Bank Limited dated April 6,
2020[5]
However, the RBI seems to have had a view, stated in a mail
addressed to the IBA, that the moratorium did not affect past
obligations of the customer. Hence, if the account was in
default as on 1st March, the DPD will continue to increase if
the payments are not cleared during the moratorium period.

Clarification on asset classification by


RBI
On 17th April, 2020, the RBI Governor addressed the public
and clarified on the above ambiguity, which, of course, was

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4/17/2020 The Great Lockdown: Standstill on asset classification – Vinod Kothari Consultants

unwarranted, relating to asset classification during the period


of moratorium. RBI has now taken the view that there would
be an asset classification standstill on all accounts, which
were standard as on 1st March, 2020, i.e. the 90-day NPA
norm shall not apply.
The RBI Governor in his public address[6], recognized that
the onset of COVID-19 has also exacerbated the challenges
for such borrowers even to honour their commitments fallen
due on or before February 29, 2020 in Standard Accounts.
Further, RBI Governor noted that the Basel Committee on
Banking Supervision (BCBS)[7]had taken cognizance of the
financial and economic impact of COVID-19 and very
recently announced that “… the payment moratorium periods
(Public or granted by banks on a voluntary basis) relating to
the COVID19 outbreak can be excluded by banks from the
number of days past due” in respect of NPA recognition.
This brings clarity as to the asset classification requirements
during the period of moratorium. A standstill would mean that
an account which was say, 30 DPD as on 1st March, 2020,
would remain 30 DPD by the end of the moratorium period as
well. There would be no aging of standard accounts during the
period of moratorium.

Accounting guidance for NBFCs


RBI has further clarified that NBFCs, which are required to
comply with Indian Accounting Standards (IndAS), may be
guided by the guidelines duly approved by their boards and as
per advisories of the Institute of Chartered Accountants of
India (ICAI)[8]in recognition of impairments. There is also a
guidance from IFRS Foundation, which clarifies that payment
holidays granted in the wake of the crisis will not be
mechanically treated as causing SICR, equivalent of “non-
performing asset”[9]

While the para dealing with NBFCs may be a bit unclear,


however, the essence is that not only will NBFCs be permitted
to keep the asset classification on hold, even the commutation
of expected losses under IFRS will also not be affected by the
mere fact of the moratorium. That is, even for IFRS purposes,
the DPD status of the loan will be on hold. The specific
reference to NBFCs is because it is only NBFCs which have
currently be migrated to Ind-ASes.

Relief to CRE loans by NBFCs


At present, in terms of the extant guidelines for banks[10], the
date for commencement for commercial operations (DCCO)
in respect of loans to commercial real estate projects delayed
for reasons beyond the control of promoters can be extended
by an additional one year, over and above the one-year
extension permitted in normal course, without treating the
same as restructuring.

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4/17/2020 The Great Lockdown: Standstill on asset classification – Vinod Kothari Consultants

The above was relief only granted to banks and not NBFCs.
RBI has now decided to extend a similar treatment to loans
given by NBFCs to commercial real estate. This will provide
relief to NBFCs as well as the real estate sector.

Moratoriums granted globally –


India is not the only country to grant a moratorium during this
time of crisis. Several other countries have granted a
moratorium in varying terms. Below is a table showing the
details of moratoriums granted globally –

Particulars USA

Features of the Moratorium Moratorium on Federal student loan borro

Moratorium on foreclosure and customer


request forbearance.

Legislation/ Regulation CARES Act, 2020

Eligibility Student loan Moratorium –

Student loan borrowers.

Forbearance –

Federally Backed Mortgage Loan borrowe


have had a financial hardship caused by C
19.

Period Student loan moratorium – All payment


student loans would be suspended for 3 m

Mortgage forbearance – Forbearance sh


granted for up to 180 days with an extensi
another 180 days upon borrower request.

Whether interest will accrue or not? Student loans moratorium – Interest wil
accrue on such loans.

Forbearance Plan –

Interest still accrues.

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4/17/2020 The Great Lockdown: Standstill on asset classification – Vinod Kothari Consultants

Particulars USA

Other features Student loan –

It will be deemed for each month for whic


payment was suspended, as if the borrowe
loan had made a payment for the purpose
loan forgiveness authorized for which the
would have otherwise qualified.

Mortgage forbearance –

Servicers are required to remit P&I on sch


dates regardless of whether it receives pay
from borrowers.

[1]https://blogs.imf.org/2020/04/14/the-great-lockdown-
worst-economic-downturn-since-the-great-depression/
[2]The IMF has introduced a Policy tracker for tracking all
policy reforms due to COVID-19 across the globe –
https://www.imf.org/en/Topics/imf-and-covid19/Policy-
Responses-to-COVID-19

[3]https://www.rbi.org.in/Scripts/NotificationUser.aspx?
Id=11835&Mode=0

[4]http://vinodkothari.com/2020/03/moratorium-on-loans-
due-to-covid-19-disruption/
[5]W.P.(C) URGENT 5/2020

[6]https://rbidocs.rbi.org.in/rdocs/Content/PDFs/GOVERNORSTATEM
[7]https://www.bis.org/bcbs/publ/d498.pdf

[8]ICAI has issued guidance in this regard –


https://resource.cdn.icai.org/58829icai47941.pdf

[9]https://cdn.ifrs.org/-/media/feature/supporting-
implementation/ifrs-9/ifrs-9-ecl-and-coronavirus.pdf?la=en
[10]https://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?
Id=11806
Tags: asset classification, COVID-19, RBI

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