RBI’s COVID-19 Regulatory Package – Heading to uncertainty?

Introduction

The Covid – 19 pandemic has wreaked havoc on the world economy at large and India is no exception. In order to mitigate a fraction of the distress caused upon borrowers of term loans and working capital loans, the Reserve Bank of India (“RBI”) formulated the Covid – 19 – Regulatory Package (“Package”). The raison d'etre of the Package as highlighted in the RBI’s Statement on Developmental and Regulatory Policies (“Statement”) was inter alia to ease the financial stress caused by Covid-19 and relax debt servicing pressures.

Accordingly, on 27 March 2020, the RBI allowed banks, all-India Financial Institutions and Non-Banking Finance Companies (Collectively referred to as “Financial Institutions”) to allow their customers to opt for a “moratorium” of three months on the payment of the installments for loans and other facilities. The scheme of the Package is laudable till the extent that it aims to ameliorate or at the very least defer the financial woes of various borrowers. However, the ambiguous wording of the Package has already found itself susceptible to court proceedings and may be staring at conflicting interpretations creating more confusion that clarity regarding the scope and applicability of the Package.

What is the nature of the Package?

The Package lays down that the Financial Institutions are “permitted” to grant a moratorium of three months on the payment of all installments failing due between 1 March 2020 and 31 May 2020. However, certain recent cases in the Hon’ble Delhi and Bombay High Courts enumerate that the Package may be mandatory in nature. This would suggest that the Financial Institutions are stripped off their agency in deciding whether or not an applicant be granted the benefit of the moratorium.

In this regard, in the case of “Anant Raj Limited vs. Yes Bank Limited” (“Yes Bank”), the Delhi High Court had the occasion of traversing the contents of the Package. In this case, the Petitioner’s account had already been categorized as a Special Mention Account - 2 (“SMA-2”) in light of the Income Recognition and Asset Classification Guidelines (“IRAC Guidelines”). The Petitioner’s account was heading towards a “Non-Performing Asset” (“NPA”) classification. The Respondent, a commercial bank, contended that given the timeline under the IRAC Guidelines, if an account has been in default for a period of 90 days it is liable to be categorized as an NPA.

The Petitioner took recourse to the Statement and Package and argued that the RBI has brought these measures in order to alleviate the financial woes of borrowers such as the Petitioner. The Respondent also contended that since the Petitioner’s account is already classified as SMA-2 i.e. it is in default, it should not be able to avail the benefit of the moratorium. The Hon’ble Delhi High Court rejected this argument and held that accounts in default on 1 March 2020 may also avail the benefit of the moratorium. In doing so, the Hon’ble High Court clarified that the Package applies equally to standard accounts, accounts classified as Special Mention Account – 1 and SMA-2 accounts.

The Hon’ble Bombay High Court was also seized of interpreting the contents of the Package in “Transcon Skycity Pvt. Ltd. & Ors vs. ICICI Bank & Ors” (“Transcon”). In this case, the Petitioners had availed various financial facilities and had defaulted in servicing this debt. The dispute arose around the classification of the Petitioner’s account as an NPA. The High Court passed a “workable order” to enable the Petitioner to service his debt and held inter alia that Package would apply to accounts already in default as well and would preclude any declaration of account as NPA during such period.

Further, in the case of “Shakuntla Educational & Welfare Society vs. Punjab & Sind Bank” the Delhi High Court reaffirmed Yes Bank’s holding on the applicability of the Package to not just standard accounts but also to accounts in default before 1 March 2020.

Mandatory versus Directory

Despite the Hon’ble High Courts’ judgments, it is not clear as to whether the Package is mandatory in nature or whether Financial Institutions retain a degree of discretion in permitting the benefit of the moratorium. Both Yes Bank and Transcon dealt with accounts which were in default and would have been categorized as an NPA but for the Package. However, both the judgments have not addressed whether Financial Institutions retain any discretionary powers vis-à-vis the Package to refuse the permission of availing the moratorium benefit.

In Transcon, a specific prayer was made to the effect of directing that the Package and the Statement applies to the Petitioner. As has already been mentioned above, the application of the Package to a customer would be satisfied if the requisite conditions have been met, but the High Courts’ judgments imply that there is no requirement of discretion on part of the Financial Institution. Accordingly, if customers choose to avail the benefit of the moratorium that would ipso facto translate into them being bestowed with the benefit irrespective of their actual cash flow statements for the months of March-May.

In both the Statement and the Package, the RBI has chosen to use the words “are permitted to grant/allow” while laying down the modalities within which a Financial Institution may choose to permit the benefit of the moratorium. This would imply, that the final decision to grant or to refuse a moratorium would be within the discretion of the Financial Institutions subject to reasons deemed fit by the respective Financial Institution. None of the decisions entered into this aspect.

Extending the scope of the Package beyond its mandate

The Bombay High Court also accorded a relief to the Petitioner which is absent in the Package and the Statement. In this regard, the Bombay High Court held that “if the lockdown extends beyond 31st May 2020, then these days will be deferred accordingly, irrespective of whether the moratorium itself is extended beyond 31st May 2020.”

The Bombay High Court tagged this as a “co-terminus” relief. However, the Package does not refer to the lockdown period as such but only the period between 1 March 2020 – 31 May 2020. The High Court’s order transgresses the Package and provides the Petitioner a clock stop on the NPA computation vis-à-vis the days of lockdown.

The nation-wide lockdown was imposed in totality till 4 May 2020. However, in the ongoing third phase of the lockdown, the Government of India has formulated extensive guidelines which inter alia ease the restrictions in certain areas namely, the green and orange zones and continue the embargo on activities within the red and containment zones with some exceptions. Since, the Bombay High Court had coincided the relief of moratorium with the period of lockdown as it was till 4 May 2020, it remains to be seen as to how Financial Institutions treat the order in Transcon with the easing of restrictions. For example, the areas demarcated as “green” and “orange” zones are permitted to carry on industrial activities and are not under a stringent lockdown, leading to an anomalous situation where there has been a partial easing of the lockdown but it is still operative in a diluted form.

Extending relief to accounts already in default

In both, Yes Bank and Transcon, the High Courts have stayed away from strictly interpreting the contents of the Package. Rather, they have chosen to interpret the Package purposively in order to ameliorate the concern of debt servicing for borrowers. For example, a bare reading of Clauses 5 and 6 of the Package, implies that the benefit of the moratorium was brought in to address the concerns of standard accounts which had been regularly servicing their debts. Clauses 5 and 6 are silent with respect to those accounts which have faced strain in the past and have been declared as an SMA-1 or SMA-2. Further, neither the Statement nor the Package explicitly envisage a moratorium on payments which had become due prior to 1 March 2020. However, both the Delhi High Court and the Bombay High Court extended the relief of the Moratorium to such accounts as well. Such an interpretation is generally in line with the ethos of the RBI’s Package.

Final Thoughts

The interpretation of the Package by the High Courts, specifically in relation to accounts which are in default is a welcome move. It caters to those accounts already marred by financial strain which would be exacerbated by the pandemic. However, the provision of the co-terminus relief by the High Court of Bombay to the period of the “lockdown” leads to a confusing scenario in light of the lifting of restrictions on the lockdown. Further, the lack of clarity about the nature of the Package takes away a vital tool for the Financial Institutions who may have to compulsorily provide the benefit of the moratorium. Such a move may have larger implications for the liquidity levels of the Financial Institutions. It remains to be seen as to how the Supreme Court interprets the Package in the event of any of these judgements being challenged especially with respect to the “scope” and “applicability” of the Package.

The authors are Malak Bhatt, Advocate-on-Record, Supreme Court of India; and Atreyo Banerjee, Advocate. They are part of Chambers of Malak Bhatt and can be reached at malakbhatt@gmail.com and atreyobanerjee2019@gmail.com.