COVID-19 puts moratorium on classification of assets

Introduction

The outbreak of novel Coronavirus (COVID-19) has created a havoc across the globe leading to unprecedented shutting down of cities/entire countries to curb its spread. India is also under national lockdown till May 3, 2020. Following the lockdown order issued by the Central Government, Government of India (“Govt.”), the Reserve Bank of India (RBI) vide its Statement dated March 27, 2020 (“Statement”) declared moratorium for three months on payment of instalments inter alia “Term Loans” which were outstanding as on March 1, 2020. Subsequently, to curtail down the ambiguity encompassing with regard to consideration of moratorium period for declaration as Non- Performing Assets (NPAs), RBI issued a Notification on April 17, 2020 clarifying that for the purpose of asset classification, even if the account is overdue as on March, 1 2020, the moratorium period would be excluded. In the intervening time, the Delhi High Court (“Delhi HC”) and Bombay High Court (“Bombay HC”) had to deal with the question of “consideration of moratorium period”.

How High Courts dealt with “consideration of moratorium period”

Delhi HC position

The Delhi HC dealt with the ambiguity in Anand Raj Ltd. vs. Yes Bank Ltdⁱ. wherein the Petitioner prayed to restrain the Respondent to declare its loan account as an NPA. The Petitioner contended that it has been making regular repayments of instalments to the Respondent till 31.12.2019. However, due to pandemic of COVID-19, the real estate industries were adversely affected and as such, the Petitioner defaulted in repayment of instalment which was due on January 1, 2020. Moreover, the RBI’s Statement imposed moratorium on payment of instalment as well as directed of re-scheduling of payments adjusting the moratorium period. Further, the RBI’s “Regulatory Package” dated March 27, 2020 (“Regulatory Package”) provided that moratorium will be applicable on instalmentsⁱⁱ falling due between March 1, 2020 and May 31, 2020, and the classification of assets has to be determined on the basis of revised due date and the revised repayment schedule. In response, the Respondent contended that its system is following the Income Recognition and Asset Classification (IRAC) guidelines issued by the RBI which stated that if an instalment is overdue by a period of 30/60 days then the borrower’s account to be classified as “Special Mention Account – 1/2 (SMA-1 or 2)” respectively and if the overdue is by a period of 90 days, the account to be classified as an NPA. Correspondingly, as the Petitioner defaulted in payment of instalment, its account has already been classified as SMA-1 and SMA-2. The benefits of RBI’s Statement as well as the Regulatory Package respectively were not available to the Petitioner as it was already in default. The Respondent further retaliated by referring to the letter dated March 31, 2020 issued by RBI to Indian Banks Association wherein it clarified that anyone defaulting before March 1, 2020 cannot be said to be a result of economic fall due to COVID-19 and will be governed by IRAC guidelines and such benefit of moratorium can only be extended to those whose payments are falling overdue between March 1, 2020 and May 31, 2020.

However, the Delhi HC did not agree with the assertions of the Respondent and held that the intent of RBI’s Statement was to maintain status quo as on March 1, 2020 in respect of all the instalments, payments of which has to be made post May 31, 2020. It further rejected the contention of the Respondent that prior declaration of Petitioner’s account as SMAs will exclude the applicability of moratorium period and held that classification prescribed in the RBI’s Statement and Regulatory Package itself clarifies that irrespective of the account’s classification prior to March 1, 2020, the status quo of the account has to be maintained during the mortarium period. Hence, the Petitioner was granted the relief on stay of declaration of its account as NPA. Nevertheless, the Court further held that the stipulated interest and penal charges will continue to accrue on the outstanding payment even during the moratorium period and if post mortarium default occurs then the classification would be as per the IRAC guidelines.

Bombay HC follows ‘en suite’

The ratio of the Anand Raj Ltd. was followed by the Bombay HC in Transcon Skycity Pvt. Ltd. and Ors. vs. ICICI Bank and Orsⁱⁱⁱ. and the Petitioner was granted the relief sought. Recently, the same issue was again raised before the Delhi HC in JR Toll Road Pvt. Ltd. vs. Yes Bank Ltd^iv. wherein the Delhi HC followed the dictum of Anand Raj Ltd. and also considered the RBI’s clarification notification dated April 17, 2020 which states that the although account is overdue as on February 29, 2020, no account shall be classified during the moratorium period, to grant interim relief as prayed for by the Petitioner.

Revised position

The Orders of the respective High Courts as well as the RBI’s clarification notification dated April 17, 2020 have now made the position clear that irrespective of the status of classification of defaulters account or instalment payment being overdue, pre or post March 1, 2020, the moratorium period will be necessarily applicable for considering the further classification, if any and the payment schedule has to be revised by the bank/financial institutions post May 31, 2020.

(i) Writ Petition (C) No. Urgent 5/2020. Order pronounced on 06.04.2020

(ii) (i) principal and/or interest components; (ii) bullet repayments; (iii) Equated Monthly instalments; (iv) credit card dues.

(iii) Writ Petition LD-VC Nos. 28 and 30 of 2020. Order pronounced on 17.04.2020

(iv) Writ Petition (C) No. 2970/2020. Order pronounced on 17.04.2020