This year has been one of the worst nightmare any country would have anticipated. The Indian economy was already slowing in the past few years with subdued consumer demand and tepid investments, before COVID-19 pandemic struck.
To address the volatility in the economy, the Reserve Bank of India (RBI) permitted the lending institutions to allow a three months moratorium on all term loans outstanding and working capital facilities on March 27, 2020, being effective from March 1, 2020 to May 31, 2020, to mitigate the burden of borrowers brought due to disruption on account of COVID-19 pandemic and also, to ensure continuity of business. However, the said relief provided by RBI was not enough, since, the lockdown had extended and there was continuing disruptions on account of COVID-19 pandemic. Subsequently, RBI on May 22, 2020, extended this period of moratorium for another three months, being effective from June 1, 2020 to August 31, 2020.
While there was a clamour, that RBI would further extend the moratorium period till December, 2020. However, to everyone’s surprise, RBI recently announced a slew of measures to address stress on the banking system including providing a window under the ‘Prudential Framework for Resolution of Stressed Assets’ dated June 7, 2019, to allow lenders the freedom to restructure the loans for eligible borrowers, both corporate and individual, subject to other conditions as may be laid down by the banks. The restructuring of the loans would be applicable to only such accounts which were not in default for more than 30 days as of March 1, 2020, and such restructuring may be invoked prior to December 31, 2020. Also, the restructuring of loans has been provided to the stressed MSME borrowers, which has been severely hit by the pandemic.
The RBI has also enhanced the limit on loans taken against gold ornaments and jewellery for non-agriculture purpose from 75 per cent to 90 per cent, which shall be available till March 31, 2021. This measure will certainly help major section of the society and will provide more money in the hands of people who in difficult times borrow money by pledging their gold.
Further, the RBI has provided the Priority Sector Lending (PSL) status to start-ups, which will help companies in various sectors to get timely access to credit available in the market. This measure will encourage the budding entrepreneurs to take risk for their projects and will also generate lot of employment opportunities to the public at large.
The Government has already announced the Aatma Nirbhar Bharat Abhiyan package to the tune of Rs. 20 lakh crore, being equivalent to 10% of the country’s GDP for reviving the pandemic hit economy. The Government through this package has tried to provide relief to those affected by this pandemic including MSME, migrant workers, farmers, street vendors. The special focus of the package has been on the MSME sector which has been severely hit by the pandemic, wherein collateral free loans for the business will be provided by the banks and guaranteed by the Government. The purpose of the package is to provide easily available credit to small business, so that they remain operative, viable and sustainable during this period. Further, in order to mitigate impact of the pandemic, the Government has suspended certain provisions of the Insolvency and Bankruptcy Code, for a period of six months, effective from March 25, 2020, to protect companies from being forced into insolvency proceedings due to default in repayment of their loans in time.
The measures announced by RBI and Government complement each other and provides a much needed relief to the stressed sectors in the economy. The RBI has wisely not extended the moratorium period as that would have put a lot of stress on the banking sector which is reeling under huge non-performing asset (NPA). At this point of time any slippage in the banks regarding containment of NPA would have wreaks havoc on the economy.
With the measures announced by RBI and Government, it is important to see COVID-19 pandemic as an opportunity for the country to further the goal of “Vocal for Local” by becoming self-reliant and to boost the manufacturing industry and encouraging foreign investors to invest in India.
Also, the Government is working on policies pertaining to land, labour, tax structure, so that the investor’s confidence remain intact and perception of their investment risk reduces. RBI, by allowing one-time restructuring of loans, has struck a fine balance between the interest of the banks and that of the borrower during such testing time.
Contributed by: Pankaj Agarwal, Partner; Yash Kothari, Senior Associate.
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