Funded Interest Term Loan (FITL) is a talk of the Bank Audit season of 2021. The treatment of this advance is not only new but confusing also. There are no clear instructions to deal such accounts which are outstanding as at 31st March 2021. There are also issues related to serving of Interest till 31st March 2021. Through this article, an attempt is being made to clarify the issue.
Funded Interest Term Loan (FITL)
In simple words, Funded Interest Term Loan (FITL) is giving a loan for repaying an existing loan. It’s a kind of loan restricting mechanism whereby lender would give the borrower money to repay the interest component of the loan. It is an ingenious tool recently brought out by RBI in order to tackle the growing NPA burden in India and further extended its arm for Covid-19. . The idea is to give the loanee breathing space to repay the loan by getting a moratorium. In this way, the pending amount to be recovered could be a recovered and FITL could be considered a blessing.
Some notable points for FITL are as follows:
a) It is giving loan for repaying a loan. Here, a lender gives the borrower money to repay the interest component of the loan.
b) When a company faces a severe financial crisis, it is not in a position to meet its loan obligations. However, if the lender is convinced that the project is viable and the borrower did not divert the earlier loans, it recasts the loan factoring in the inability of the promoters to repay even the interest component.
c) In such a situation, the loan is restructured based on the cash flow wherein the bank provides additional loan to the borrower, which can be used to repay the interest component of the original loan.
d) The borrower gets a breather to repay the loan, while the bank may be able to save the account from turning into an NPA.
e) Under the debt recast scheme, RBI allows banks to offer FITL to borrowers. The RBI norms say that FITL should be given the same asset classification as that of restructured loans. Further, the upgrade or downgrade of a restructured loan will be applicable to FITL as well.
f) FITL is usually a part of deep restructuring, which involves longer-than-usual repayment terms, lower interest rates and a moratorium on repayment. The unpaid interest component of an existing loan is usually carved out as FITL on which the bank gives the borrower a moratorium.
g) In a case, where the borrower fails to repay FITL, the lender would have no option but to classify the account as an NPA.
h) Funded Interest Term Loan (FITL), granted as part of the rectification/restructuring package , the loans shall be exempted from the provisions of Benchmark Prime Lending Rate (BPLR) means internal benchmark rate used to determine the interest rates on advances/loans sanctioned up to June 30, 2010. As per Master Direction DBR.Dir.No.85/13.03.00/2015-16 updated as on February 26, 2020
RBI – COVID-19 Regulatory Package
RBI vide its circular RBI/2019-20/186 DOR.No.BP.BC.47/21.04.048/2019-20 dated March 27, 2020 and RBI/2019-20/244 DOR.No.BP.BC.71/21.04.048/2019-20 dated May 23, 2020 has permitted banks to provide certain relief measures to their customers on account of COVID-19 pandemic. As per COVID-19 Regulatory package granted by RBI, all the banks were allowed to convert the accumulated interest for the deferment period up to 31.08.2020 into FITL, which was repayable by 31.03.2021. All customers, who having working capital facility with the Banks were eligible for FITL, The finest points were as under:
a) The FITL was granted equivalent to the amount of the accumulated interest in eligible CC/OD account for the deferment period i.e. from March 01 to August 31, 2020 into Funded Interest Term Loan (FITL), which was repayable not later than March 31, 2021.
b) The FITL was repayable in 6 EMIs, by March 31, 2021.
c) The rate of interest of FITL will be the same as that of your existing CC/OD account. Interest on FITL shall be paid monthly, as and when debited/due.
d) The repayment schedule for such loans as also the residual tenor was shifted across the board by six months after the moratorium period. If customer prefers not to avail FITL, the same can be pre-paid.
e) Customer can also prepay FITL at any point of time. No pre-payment penalty shall be charged for closure of FITL accounts.
f) As regards Term loans (TL) availed, the accrued interest during Moratorium i.e. March 01 to August 30, 2020 period on outstanding portion of TL has been capitalised and the revised repayment schedule of capitalised TL is fixed by extending the residual tenor of loan by 6 months.
g) All the terms and conditions of existing CC/OD accounts shall mutatis mutandis apply to FITL. The loan & security documents executed in respect of existing CC/OD account and the securities created to secure the existing CC/OD accounts shall continue to be valid and binding for FITL as well, without any further creation or modification
h) In respect of working capital facilities sanctioned in the form of CC/OD to borrowers facing stress on account of the pandemic, lending institutions were permitted to recalculate the drawing power by reducing the margins till August 31, 2020, as a one-time measure, such that the margins are restored by March 31, 2021, and / or review the working capital sanctioned limits up to March 31, 2021, based on a reassessment of the working capital cycle.
i) These measures will not result in asset classification downgrade of the respective facilities and will not be treated as a default for supervisory reporting and reporting to credit information companies. Lending institutions were advised to frame Board-approved policies for providing these reliefs to all eligible borrowers with full public disclosure.
RBI – Expiry of COVID-19 Regulatory Package
The Reserve Bank Of India, has come up with a notification RBI/2021-22/17DOR. STR. REC. 4/21.04.048/2021-22 dated April 7, 2021 as follows.
The Hon’ble Supreme Court of India has pronounced its judgement in the matter of Small Scale Industrial Manufacturers Association vs UOI & Ors. and other connected matters on March 23, 2021. In this connection, it is advised to Refund/adjustment of ‘interest on interest all borrowers, including those who had availed of working capital facilities during the moratorium period, irrespective of whether moratorium had been fully or partially availed, or not availed, in terms of the circulars DOR. No. BP.BC.47 /21.04.048/ 2019-20 dated March 27, 2020 and DOR.No.BP.BC.71/21.04.048/2019-20 dated May 23, 2020 (“Covid-19 Regulatory Package and the Lending institutions shall disclose the aggregate amount to be refunded /adjusted in respect of their borrowers based on the above reliefs in their financial statements for the year ending March 31, 2021
Asset classification of borrower accounts by all lending institutions following the above judgment shall continue to be governed by the extant instructions as clarified below.
i. In respect of accounts which were not granted any moratorium in terms of the Covid19 Regulatory Package, asset classification shall be as per the criteria laid out in the Master Circular – Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated July 1, 2015 or other relevant instructions as applicable to the specific category of lending institutions (IRAC Norms).
ii. In respect of accounts which were granted moratorium in terms of the Covid19 Regulatory Package, the asset classification for the period from March 1, 2020 to August 31, 2020 shall be governed in terms of the circular .No.BP.BC. 63/21.04.048 /2019-20 dated April 17, 2020, read with circular DOR.No.BP.BC. 71/21.04.048/ 2019-20 dated May 23, 2020. For the period commencing September 1, 2020, asset classification for all such accounts shall be as per the applicable IRAC Norms.
FITL- Not Performing V Performing Asset.
The FITL advance is not an independent advance as all the terms and conditions of existing CC/OD accounts applies mutatis mutandis to FITL. The loan & security documents executed in respect of existing CC/OD account and the securities created to secure the existing CC/OD accounts is valid and binding for FITL as well, without any further creation or modification . Hence the fate of FITL loan cannot be decided in isolation. The declaration of existing CC/OD account will decide the fate of FITL loan.
It is opined that NPA provisions after 31-08-2020 are as per normal provisions. FITL was due from day one and last date allowed for clearing dues and arrears was 31-03-2021. Principle bullet payment of FITL shall be paid on or before 31.03.2021 so NPA date would be 30.06.2021. But Interest would be served and paid monthly so, as per IRAC norms 2.1.3, if Interest is not paid then only NPA. IRAC norms 2.1.3 mentions that In case of interest payments, banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter. So if there was interest outstanding as on 31st December 2020, then the account will be NPA as on 31st March 2021. However if the Interest is due for the last quarter that is January to March 21 , then the account on account of Interest will be NPA as on 30th June 2021.
The said IRAC norms were issued through a Master Circular -Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances issued by RBI/2015-16/101DBR.No.BP.BC.2/21.04.048/2015-16July 1, 2015.