Why RBI COVID-19 Package is needed:
1. Some sectors which are badly impacted by Covid-19, such as hospitality and airlines need a lifeline.
2. Majority of companies in the country are also sitting on huge debts that need to be serviced. The slowdown will also impact business plans of the coming fiscal year. If any relief is provided it will act as a new source of energy for the companies to revive.
3. A relief package is must to help the companies to minimize layoffs due to the serious effect on finances dented by covid-19.
4. Severe health crisis is still to come in many developing countries like India.
Benefits provided in the package:
A. Extension of realization period of export proceeds:
- Present value of the goods or software exports made by the exporters is required to be realized fully and repatriated to the country within a period of 9 months from the date of exports. In view of the disruption caused by the COVID-19 pandemic, the time period for realization and repatriation of export proceeds for exports made up to or on July 31, 2020, has been extended to 15 months from the date of export.
- This measure will enable the exporters to realize their receipts, especially from COVID-19 affected countries within the extended period and also provide greater flexibility to the exporters to negotiate future export contracts with buyers abroad.
B. Implementation of Counter Cyclical Capital Buffer:
- The framework on countercyclical capital buffer (CCYB) was put in place by the Reserve Bank in terms of guidelines issued on February 5, 2015 wherein it was advised that the CCYB would be activated as and when the circumstances warranted, and that the decision would normally be pre-announced.
- This framework envisages the credit-to-GDP gap as the main indicator, which is used in conjunction with other supplementary indicators. Based on the review and empirical analysis of CCYB indicators, it has been decided that it is not necessary to activate CCYB for a period of one year or earlier, as may be necessary.
C. Moratorium Given on Loans :
1. Terms loans –
- All term loans such as agricultural term loans, retail and crop loans will be given Moratorium of 3 months for payment of all installments(Principle and Interest) falling in b/w 01.March.2020 to 31.May.2020.
- So after three months the repayment schedule of the loans will be shifted accordingly so as to recover the delayed installments over the period.
2. Working capital loans –
- In these kind of facilities Interest deferment for the months of March, April, May can be availed by borrower on the application to the Bank.
- So the Interest for 3 months will not be recovered on monthly basis but the accumulated accrued interest will be recovered after third month immediately.
Clarifications to some of the questions that may arise on the above relaxations:
Question: Whether this scheme is Mandatory or optional ?
Answer: It is an optional benefit.
Question: How to opt for such benefit ?
Answer: Borrower has to make application to respective bank in order to avail such benefit. Bank cannot apply scheme at its own without any application.
Question: Whether the interest will apply on balance outstanding of 29.Feb.2020 if moratorium is option is availed ?
Answer: Yes, The interest will duly accrue on the balance outstanding during the moratorium period.
Question: Whether such benefit can be availed for Credit Card ?
Answer: Yes, Moratorium may also be availed on these dues i.e. Credit card due can be deferred for 3months on the application of card user.
Question: Whether this benefit can be availed from NBFCs and Cooperative Banks ?
Answer: Yes, this RBI scheme applies on NBFCs and Cooperative banks also.
Question: Whether CIBIL score will get affected due to availment of such benefits?
Answer: No, The rescheduling of payments, including interest, will not qualify as a default for the purposes of supervisory reporting and reporting to Credit Information Companies such as CIBIL by the lending institutions.
So, It will not adversely impact the credit history of the beneficiaries.
3. Other additional benefits :
In respect of working capital facilities sanctioned in the form of CC/OD to borrowers facing stress on account of the economic fallout of the pandemic, banks may recalculate the ‘drawing power’ by reducing the margins and/or by reassessing the working capital cycle.
Most of the banks are giving 10% Enhancements in Current sanction limit of CC/OD on the basis of availability of required Stock in trade and other required securities. But these benefits may vary bank to bank.
Effects on NPA classification of COVID-19 – Regulatory Package
As these Moratorium, Interest deferment are provided specifically to enable the borrowers to tide over economic fallout from COVID-19.
So these will not result in asset classification downgrade.
Classification of NPA norms rules will apply after the completion of the deferment period and as per the revised terms as permitted.
Examples:
Consider that a Term loan is overdue for 10 days on 29.Feb.2020 and the borrower has opted for benefits provided i.e. Moratorium of EMIs for next 3 months.
For such loan the period from 01.March.2020 to 30.May.2020 shall not be considered for calculating the period of 90 days for NPA classification of such loan.
But from 01.June.2020 onwards NPA overdue period calculation will start and If such loans remained outstanding for more than 80 days after 01.June.2020 it will be classified as NPA.
Provisioning of In Default Standard Accounts as on 29.FEB.2020
In respect of accounts in default but standard (i.e. overdue) as on 29.Feb.2020 and which has availed the COVID package Moratorium, the period of next 3 months shall be excluded from calculating the number of days for the purpose 90 days of NPA classification .
But the lending institutions shall make general provisions of not less than 10 per cent of the total outstanding of such overdue accounts, to be phased over two quarters as under:
(i) Quarter ended March 31, 2020 – not less than 5 per cent
(ii) Quarter ending June 30, 2020 – not less than 5 per cent.
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