It is imperative that all borrowers are treated indifferently by the banks and hence, moratorium should be granted to NBFCs; however, it may be done on a case-to-case basis.
Owing to COVID-19 and the nationwide lockdown, people from all walks of life are facing various practical difficulties. The government and various regulators are trying to find a transitory solution to such difficulties. One of the issues is the financial stress faced by the borrowers in the form of inability to repay the amount borrowed by way of loans and debts due to closure of businesses and industries in the country. To resolve it, the Reserve Bank of India (RBI) had issued a circular on March 27, 2020, relaxing repayment pressures and improving access to working capital. Under the RBI circular, all commercial banks, cooperative banks, and all financial and non-banking financial institutions (NBFCs) are permitted to grant a moratorium of three months on payment of instalment which may fall due between March 1, 2020, and May 31, 2020. Such moratorium can be granted for term loans and working capital facilities given in the form of cash credit or overdraft. Further, the discretion to grant or not grant moratorium has been given to the lending institution. Pursuant to the RBI circular, while some were relieved, certain issues arose for others; two of these are discussed here.
Firstly, the RBI circular only grants moratorium towards monies borrowed in the form of term loans and cash credit/overdrafts. Other kinds of borrowings, such as those made through various money market (such as, commercial papers) or capital market instruments (such as, debentures) were not addressed in the said circular. While the former is governed by the RBI, capital market instruments are under the regulatory domain of the Securities and Exchange Board of India (SEBI).
Typically, a debt instrument is graded by credit rating agencies registered with SEBI and in case a mutual fund has invested in the same, then the valuation of such debt instruments is provided by various valuation agencies. Further, as per SEBI circular dated September 24, 2019, any extension in the maturity of a money market or debt security is to be treated as ‘default’ by a mutual fund. On March 30 and April 23, SEBI has issued two circulars granting some relief to the borrowers. Through these circulars, SEBI has allowed credit rating agencies and valuation agencies to not consider delay in payment of interest/principal or extension of the maturity of a security arising solely due to COVID-19 as a default. However, the disclosure requirements for any delay /default in interest or principal payment obligations provided under Regulation 51 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 for the issuers, continue to remain in force.
Since no explicit moratorium advisory has been issued for debt instruments, one of the NBFCs, Indiabulls Housing Finance Limited, filed a petition before the High Court of Delhi challenging the RBI circular for want of clarity and requesting the court to direct the respondent Small Industries and Development Bank of India (SIDBI) to grant Indiabulls a moratorium on its repayment obligations towards the non-convertible debentures issued to SIDBI. On April 15, a single judge bench of the court passed an interim order granting Indiabulls’ request and directed SIDBI to not demand any further repayment (beginning the April instalment) until a clarification is received from the RBI in this regard. However, on May 4, the said order was quashed by a division bench of the court, accepting the plea of the appellants therein (i.e. SEBI and others) that the RBI circular deals with terms loans and cash credit / overdraft; it cannot be applied on the debentures, which are under the regulatory domain of SEBI.
It must be noted that any such exclusive relaxation from fulfilment of debt obligations to one NBFC by the court would open floodgates of litigation. Further, it must be remembered that borrowings through such debt instruments are made pursuant to bilateral agreement between the issuer and the investors/security-holders. Such private agreements can be usually modified on receipt of consent from majority holders, and requisite moratorium may be granted to the issuers of debt instruments.
Secondly, the discretion to give or not give a moratorium under the RBI circular has been left with the lending institution, banks, NBFCs, etc. Typically, an NBFC will provide financial assistance to various entities and in turn, may borrow monies from banks in order to gather sufficient finance for the same. The monies received from the borrowers in the form of interest or principal is then paid by the NBFCs to the banks towards their loan repayment obligations. Pursuant to the RBI circular, certain NBFCs have granted moratorium to their borrowers due to which their cash inflows in the form of interest or principal have reduced. However, many commercial banks have decided to not grant a moratorium to the NBFCs who had taken various loans from them; leading to the possibility of default in repayment by the NBFCs to the banks. Reasons for such reluctance towards granting moratorium to the NBFCs include apprehension that NBFCs may misuse the moratorium, and in some cases, banks are also of the view that the NBFCs have not been hit hard by the nationwide lockdown.
Borrowers should be treated indifferently
It is imperative that all borrowers are treated indifferently by the banks and hence, the moratorium should be granted to NBFCs; however, it may be done on a case-to-case basis. As suggested in the SEBI circulars referred above, if the banks are of the view that financial difficulties being faced by an NBFC is due to COVID-19, it may be granted requisite moratorium by the banks.Deepika Goyal is a Senior Associate at Finsec Law Advisors