A major point left open for interpretation in the RBI circular dated 27th March 2020 (DOR.No.BP.BC.47/21.04.048/2019-20) titled ‘Covid 19 – Regulatory Package’ (“the said Circular“) has been settled by the Hon’ble Delhi High Court in Anant Raj Limited vs Yes Bank Limited (W.P.(C) URGENT 5/2020) vide its order dated 6th April 2020.

FACTS Anant Raj Limited (“Petitioner” / “Borrower“) had availed loan facilities to the tune of Rs. 1570 crores out of which, it had already repaid about Rs. 1056 crores to Yes bank Limited (“Respondent” / “Lender“). The Petitioner was regular in its debt servicing till 31st December 2019. 

However, the Petitioner failed to service its debt obligations from 1st January 2020 onwards for a period of 60 days, as a result of which the loan account of the Petitioner was first classified as SMA-1 and subsequently as SMA-2 as on 1st March 2020 in accordance with the Income Recognition and Asset Classification Guidelines (“IRAC Guidelines“).

ISSUE

The main question which arose before the hon’ble Court was whether the Respondent could classify Petitioner’s loan account as a Non-Performing Asset (NPA) as the Borrower was already in default and the said default was continuing post 1st March 2020 till 31st March 2020.

CONTENTIONS

The Respondent argued that the said Circular is not applicable to the case of the Petitioner, in as much as, the Petitioner was already in default as on 1st March 2020 and the reliefs as contained in the said Circular is applicable only to those instalments which fall due or after 1st March 2020 and also only to those borrowers who were properly servicing their accounts hitherto. 

A reference was also made to a clarification issued vide email dated 31st March 2020 by the RBI to Indian Banks Association (“RBI Clarification Letter“), wherein it is stated that if a borrower has been in default even before 1st March 2020, such default cannot be said to be as a result of economic fall due to Corona pandemic and benefit of moratorium can be extended to such borrower only in respect of payments falling due during the period 1st March 2020 to 31st May 2020.

The Petitioner placed heavy reliance on the said Circular and sought relief on the grounds that the Covid19 pandemic has disrupted the financial sector and adversely affected the ability to meet debt obligations. The Petitioner contended that the benefit of the said Circular (inter alia relaxation in repayment schedule/payment moratorium/revised asset classification) should be extended to him and his loan account shouldn’t be downgraded any further.

DECISION

The Delhi High Court delved into the asset classification process and the legislative intention of RBI behind the said Circular. It highlighted the following major points:

1. The Court observed that a loan account cannot be declared as NPA without first being classified as SMA 2. In the present case, the Petitioner’s loan account was liable to become NPA on account of payment defaults from 1st March 2020 to 31st March 2020 which in turn falls within the moratorium period provided by RBI under the said Circular.
2. The Court while not agreeing with Respondent’s earlier contention observed that had RBI intended to restrict the scope of the said Circular only to standard loan accounts, it would not have covered NPA classification (which can happen only after the process of SMA 1 and SMA 2) and would have merely mentioned about classification of standard accounts as SMAs in the said Circular. 

Therefore, the Court held that the said Circular is also applicable to the stressed accounts and the intention of RBI is to maintain status quo with regard to the classification of accounts of the borrowers as on 1st March 2020. 

In the present case, the Petitioner’s loan account was already classified as SMA 2 as on 1st March 2020 and was liable to be further classified as NPA on account of payment defaults from 1st March 2020 to 31st March 2020. The Court applied the said Circular to Petitioner’s case and observed that the Statement on Development and Regulatory Policies issued by RBI on 27th March, 2020 read together with the said Circular prima facie shows that the intention of RBI is to maintain status quo as on 1st March 2020 with regards to all types of installment payments which were due post 1st March 2020 till 31st May 2020. 

Thus, the Court finally held that the Respondent could not classify the loan account of the Petitioner as NPA on account of payment defaults falling within the moratorium period (1st March 2020 to 31st May 2020) and status quo as regards the classification of Petitioner’s loan account as SMA 2 shall have to be maintained.

OBSERVATIONS

Our GDP and the Indian economy in general has been declining constantly since last year and the present Covid-19 pandemic has only worsened the situation. We are facing economic difficulties across all sectors such as real estate, automobile, construction, finance, services etc. 

The RBI Clarification Letter as mentioned earlier has ascribed a great deal of importance to the moratorium period i.e., 1st March 2020 to 31st May 2020 and has treated 1st March 2020 to be a sacrosanct and inviolable triggering point. In such testing times (which were already continuing before the Corona crisis aggravated in India), it is unfair and unreasonable to tie down the borrowers against a particular date and expect them to meet their debt obligations without regard to the exigency of the present situation. 

The intent behind the RBI Clarification Letter appears to be that habitual and willful defaulters are restrained from exploiting the current Covid-19 pandemic situation to their benefit. Although, the intent of the regulator is bona fide, it has inadvertently imperiled those honest and genuine borrowers whose hands are pretty much tied up in this lockdown situation and are struggling to fulfill their debt obligations (albeit belatedly) but in good faith.  

While the confusion regarding applicability of the said Circular over stressed accounts has been put to rest, the much-debated issue regarding the accounts which are already NPAs as on 1st March 2020 remains to be decided by the Delhi High Court. While it is obvious that the asset classification and provisioning norms would remain unaffected for accounts which are already classified as NPA as on 1st March 2020, what would be the liability on such borrowers for making due payments during the period commencing from 1st March 2020. We have considered this issue in our previous article as well and the present judgment of the Delhi High Court also appears to be principally in-sync with the rationale that the Regulatory Package is intended to extend to stressed assets as well. Although the RBI Clarification Letter states that the benefits are not available in respect of stressed assets, it is inequitable to treat an SMA-1, SMA-2 and/or NPA on different footing in the present national emergency which is being faced by all businesses alike within the country. In fact, it is unlikely that even if lending institutions had the liberty to take coercive actions, they would be in any better position to make any recoveries in the present circumstances and therefore it would be advisable to extend the moratorium even for payments for accounts which have already been classified as NPA. The order of the Delhi High Court definitely seems like a step in the right direction.

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