RBI Moratorium and NPAs: The Uncertainty Still Persists?

[Nikhil Purohit is a IV year student at the National Law School of India University, Bangalore]

The outbreak of the Covid-19 pandemic and its responses such as the imposition of lockdowns have created significant financial disruption in economies globally. A recent interesting example could be seen in the crude oil prices touching negative territory for the first time. In order to ease the financial burdens induced by the pandemic, the Reserve Bank of India (RBI) came up with a Statement on Developmental Regulatory Policies and a Covid-19 Regulatory Package, both dated 27 March 2020. A combined reading of clause 5 of the Statement and clause 2 of the Regulatory Package indicates that for all loan repayments due between 1 March 2020 and 31 May 2020, a moratorium of three months has been provided. Clause 2 of the Regulatory Package further clarifies that the interest shall, however, continue to accrue during this period. Further, according to clause 5 of the Regulatory Package, this three month period would not result in “asset classification downgrade” and, thus, would not be factored while classifying any asset as a non-performing asset (NPA).

While the treatment of all loans due between the above mentioned three-month period is clear and the benefits of moratorium are certainly applicable to such loans, the question that then remains as to what happens to loans that were due for payment prior to 1 March 2020. This poses a particular problem as to the classification of an asset as an NPA. According to the Prudential Norms on Income Recognition, Asset Classification and Provisioning Pertaining to Advances (‘IRAC norms’) of the RBI, an asset would be considered an NPA when an instalment or interest for a term loan remains overdue for over 90 days. Thus, those assets for which payments had not met this 90 days cut-off by 1 March 2020, but were due prior to this deadline, risk being declared as an NPA in the midst of the pandemic.

Prior Orders

This question was first addressed by the Delhi High Court in Anant Raj Limited v Yes Bank Limited. The Court undertook a combined reading of the Statement, the Regulatory Package, and the IRAC norms. It noted that since the classification of an asset goes through stages of being declared as a Special Mention Account- 1 (SMA-1) and Special Mention Account- 2 (SMA-2), if the moratorium period were to be applicable only to standard asset accounts (where no default was present until 1 March 2020), the RBI did not need to explicitly refer to NPAs in the Regulatory Package. It could have merely altered the timelines for declaration as an SMA. However, according to the Court, the Regulatory Package stipulates that no asset that has been classified as SMA-2 would be further classified as an NPA for the duration of the moratorium period. Through this analysis and its interpretation of the intention of the RBI scheme to be to maintain the status quo as on 1 March, the Court concluded that the benefit of the moratorium would be advanced to loans due prior to 1 March as well.

A similar question was encountered by the Bombay High Court in Transcon Skycity Private Ltd v ICICI Bank and Transcon Iconica Private Ltd v ICICI Bank (discussed in detail here). The Court here noted the decision in Anant Raj but held that the moratorium period for which the lockdown is in place would not be calculated in the 90 days limit for classification of an asset as an NPA. Thus, the Court delinked the exemption granted in this case from the ‘moratorium’ and linked it with the ‘lockdown’ instead. This is further emphasised by stating that “if the lockdown is lifted at an earlier date than 31st May 2020, then this protection available to the Petitioners will cease on the date of lifting of the lockdown”. Moreover, the Court explicitly clarified that this decision would not serve as a precedent and such cases would be dealt with on a case-by-case basis.

Shakuntala Educational & Welfare Society Case

The question of applicability of the moratorium period in the classification of an asset as an NPA has most recently been addressed in another Delhi High Court order in Shakuntala Educational & Welfare Society v Punjab & Sind Bank. In this case, the Shakuntala Educational & Welfare Society was a charitable society engaged in the business of technical and higher education. It sought the benefit of the moratorium period for loans that were due on 31 December 2019, and were payable until 31 March 2020. Further, Shakuntala Educational & Welfare Society expressed its inability to pay as several of its schools run in Uttar Pradesh (UP) were affected by the state government directive by which they could not insist on students making fee payments. The Court did not rule on the applicability of the moratorium period to the pending loans, but rather deferred this question to the completion of pleadings and the stand that the RBI takes. It, however, concurred with the observation in Anant Raj that the regulatory package intended to maintain status quo as on 1 March  as far as classification of accounts is concerned. It, thus, granted an interim relief to Shakuntala Educational & Welfare Society by restraining Punjab & Sind Bank from declaring the loans as an NPA until the next hearing.

The Court, however, added a caveat in this order stating that in case the directive of the UP government prohibiting fee collection is lifted before the next hearing, Shakuntala Educational & Welfare Society would be liable to pay the pending dues within one week of such lifting. It must be noted that this was a proposal made by Shakuntala Educational & Welfare Society itself in its arguments. However, what this does is that despite theoretically siding with the position in Anant Raj as to the maintenance of status quo due to the Regulatory Package, the Court, in effect, has delinked the NPA question from both the lockdown and the moratorium order. It has instead confined it to a very specific element influenced by the lockdown.

Conclusion

From the three orders as examined above, it can be seen that the question of classification of an asset as an NPA for dues pending prior to 1 March still remains unanswered. Whereas the decision in Anant Raj seeks to, in effect, extend the moratorium period to such loans by using the language of maintenance of status quo and justifying the same by a contextual reading of the Regulatory Package, this clarity is undone by the subsequent orders. The orders in both Transcon and Shakuntala are very fact-specific enquiries, the former even reiterating that it cannot be treated as a precedent. Both of them delinked the classification question from the moratorium and attached it to the lockdown and the state government directive instead. While this might have been a prudent solution in light of the facts of the respective cases, due to their fact-specific nature these decisions do not provide any guidance for similarly placed assets at the risk of being declared an NPA. In my view, the decision in Anant Raj provides a plausible interpretation of the Regulatory Package and is in line with the intent of the same. A contrary interpretation would defeat the very purpose that the RBI seeks to achieve, that to ease the financial burden amidst these extraordinary circumstances. However, greater clarity would probably be achieved only after looking at the stance that the RBI takes, either through a clarificatory notification or through its stance in Shakuntala which is next posted for hearing on 4 May 2020.

– Nikhil Purohit