The ongoing Pandemic has brought havoc like situation in all sectors. The same is the condition of the Banking sector as well. RBI has provided certain relaxations but there still remains a question for all those people who are facing a trouble with the default in loans. And the reason for such troublesome situation is:
1. There are no specific banking regulatory guidelines for dealing with pandemics
2. Most loan-related contractual agreements don’t have force majeure clause
3. A payment default could trigger default in other financing documents
Inability to recover dues may also affect the lending ability of banks
a) With continued restrictions and businesses slowing down, there is a clearly inevitable eventuality of default on loan repayments with many businesses unable to perform their loan obligations. The Banking sector therefore must find ways of navigating through this crisis taking into account that many businesses as a matter of business routine obtained working capital from Banks. Banks in this regard, need to take appropriate measures to minimize the impact of defaulting loans.
b) Loans being contracts, should in normal circumstances have carried clauses making provision in their contracts to deal with unforeseen events. This is commonly referred to as “force majeure” clauses. However, most loan-related contracts do not have “force majeure” clauses.
c) A force majeure clause where it exists is intended to suspend or terminate the contractual obligations in the event of an occurrence outside the control of the parties. Invoking force majeure ultimately suspends one’s obligations under their contract for so long as the force majeure event persists. If the event is still continuing at the end of that period then the contract will be considered to be terminated.
d) Covid -19 , however does not fall within the known force majeure banking clauses in the usual loan contracts. There is no specific banking regulatory guidelines for dealing with pandemics. The current loan clause akin to force majeure simply provide for material adverse event or change. An occurrence of a material adverse effect would ultimately trigger an event of default which would allow the lending Bank to demand repayment of outstanding loans. This clause therefore, does not waive performance of a borrower’s loan obligation, but rather leaves it to the discretion of the Bank to identify what a material change is, in light of financial conditions resulting in adverse business operations of the borrower. The material adverse change clause therefore does not address the Covid -19 pandemic as unforeseen event within the context of the loan agreement.
e) The Covid-19 pandemic, is accordingly a situation beyond the banks’ normal risk expectations and operations in the management of risk. The risk management structures as currently obtaining in banks does not prepare them for readiness of how to risk-manage the COVID -19 pandemic. There are no parameters which the banks’ risk managers can come out with, in putting together a comprehensive, quantitative and qualitative analysis to locate whether the Covid-19 pandemic is a minor, major or indefinite risk. Consequently putting in place a prudent recovery plan is a nightmare to banks in the Covid-19 pandemic context.
f) The Covid -19 risk therefore not fitting within the usual risk contemplated by banks, it is imperative for banks to putting in place a recovery plan to handle the reality of the Covid-19 pandemic if they and their customers are to stay in business.
g) Banks must take bold steps to revisit all loan repayment contracts and defer demand for early repayment, halt additional fines for late repayments, and waive penalty interest in the event of default or arrears on any installment. Banks need to vigorously articulate their approach to risk in the Covid-19 era and boldly find bankable solutions. Herein lies the exceptional challenge and may be opportunities in the Covid -19 pandemic era.