The Covid-19 pandemic has disrupted the global economy as economic activities have to come a halt in developed and developing economies. The impact on the capital markets is also seen as investors look for a safe haven to park their money, What’s in it for the lenders in the financial system? Where are the opportunities and challenges?
As we close for the financial year, the Reserve Bank of India(RBI) has, to the relief of borrowers and lenders, announced temporary measures on March 27, 2020 to arrestany disruption caused by COVID -19. These measures give financial institutions few days before financial year end to enter into and provide for innovative trades in the current financial year. On the other hand, for corporate India, it is a path just half way walked as these measures are largely in the nature of deferment and not financial waivers.
At a policy level, RBI expects banks in India to collect interest andwhile it has not waived charging of interest, RBI has now ‘permitted’ all lending institutions within its supervisory regime to grant a moratorium to borrowers on payments for instalments falling due between March 1, 2020 and May 31, 2020 for term and working capital loans. The key aspect of RBI’s package is that dispensation is to be granted to those borrowers whose ability to service debt has been affected by COVID-19. Although, interest continues to accrue during moratorium and payment is deferred post May 2020. As capital relief to the lenders, RBI has provided that lenders will not have to provision for or adversely classify any borrowing account solely on account of granting such leeway.
Unlike commercial contracts, financing contracts usually do not contain terms which permit a borrower to ‘walk away’ from their obligations on account of unforeseeable events. To the contrary, such events may bring a material adverse change in the business of the borrower and give lenders a right to invoke an event of default and accelerate the loan. But, desperate times call for desperate measures – while it is established that no lender is going to accelerate on account of Covid-19, factors existing prior to Covid-19 may still enable lenders to enforce financing documents.
The Indian loan market, in light of the restrictions on end use and accessibility to foreign investors, is limited to two-fold avenues – loans and bonds. Foreign Portfolio Investor (FPI) investments in non-convertible debentures is now a norm and a preferred lending tool. While, RBI has provided some latitude on loans, there is no similar benefit extended to bonds. There is no stipulation by SEBI either, probably rightfully so on account of jurisdictional issues, on how FPIs should treat bonds. Borrowers who have treated debentures as their preferred route for borrowing, would need to proactivelyseek waivers, which would, require significant negotiation in the present times.
A window on a new product, which has otherwise been quite controversial, has now been opened to leverage the volatility on Indian Rupee. Indian Banks operating in IFSCs and IBUs have been permitted to deal in ‘non-deliverableforwards’ involved in rupee with non-resident entities. Foreign banks operating in India would view this as a welcome change, given the regulatory scrutiny this product has undergone in the past. Additionally, on the OTC derivatives front, the RBI has provided a further breathing space to banks to not calculate non centrally cleared trades for reckoning large exposures.
A healthy banking system is the backbone of any economy. From the days of the 2008 financial crisis to the present date, the RBI has been cautious in allowing innovative products in the financing space and the measures by RBI have largely yielded results by insulating India from being adversely impacted by the stress across the world. As hope is eternal, there is a general belief that even through COVID-19 the markets for existing loans should come out largely unscathed. Fresh access to capital and the risks that banks would be willing to take once all this tides over and most importantly the recourse to the insolvency courts in case of defaults, would each be a story for another day!
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