Summary of key announcements by reserve bank of India 17th April, 2020

RBI has taken following measures to
(i) maintain adequate liquidity in the system and its constituents in the face of COVID-19 related dislocations;
(ii) facilitate and incentivise bank credit flows;
(iii) ease financial stress; and
(iv) enable the normal functioning of markets.

Liquidity management

1. Targeted Long Term Operations (TLTRO) 2.0:

To conduct targeted long-term repo operations (TLTRO 2.0) for an aggregate amount of `50,000 crore. The funds availed by banks under TLTRO 2.0 should be invested in investment grade bonds, commercial paper, and non- convertible debentures of NBFCs, with at least 50 per cent of the total amount availed going to small and midsized NBFCs and MFIs. These investments have to be made within one month of the availment of liquidity from the RBI by the banks and will be classified as HTM.

2. Refinancing Facilities for All India Financial Institutions (AIFIs):

To provide special refinance facilities for a total amount of `50,000 crore to NABARD, SIDBI and NHB to enable them to meet sectoral credit needs.

This will comprise `25,000 crore to NABARD for refinancing regional rural banks (RRBs), cooperative banks and micro finance institutions (MFIs); `15,000 crore to SIDBI for on-lending/refinancing; and `10,000 crore to NHB for supporting housing finance companies (HFCs).

3. Liquidity Adjustment Facility: Fixed Rate Reverse Repo Rate:

To reduce the fixed rate reverse repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 4.0 per cent to 3.75 per cent. The policy repo rate remains unchanged at 4.40 per cent, and the marginal standing facility rate and the Bank Rate remain unchanged at 4.65 per cent.

Regulatory measures

1. Asset Classification:

It has been decided that in respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day NPA norm shall exclude the moratorium period, i.e., there would an asset classification standstill for all such accounts from March 1, 2020 to May 31, 2020. NBFCs, which are required to comply with Indian Accounting Standards (IndAS),

The banks will have to maintain higher provision of 10 per cent on all such accounts under the standstill, spread over two quarters, i.e., March, 2020 and June, 2020.

2. Extension of Resolution Timeline:

Under RBI’s prudential framework of resolution of stressed assets dated June 7, 2019, in the case of large accounts under default, Scheduled Commercial Banks, AIFIs, NBFC-ND-SIs and NBFC-D are currently required to hold an additional provision of 20 per cent if a resolution plan has not been implemented within 210 days from the date of such default.

It has now been decided that the period for resolution plan shall be extended by 90 days.

3. Distribution of Dividend

All scheduled commercial banks and cooperative banks shall not make any further dividend pay-outs from profits pertaining to the financial year ended March 31, 2020.

4. Liquidity Coverage Ratio(LCR)

The LCR requirement for Scheduled Commercial Banks is being brought down from 100 per cent to 80 per cent with immediate effect. The requirement shall be gradually restored back in two phases – 90 per cent by October 1, 2020 and 100 per cent by April 1, 2021.

5. NBFC Loans to Commercial Real Estate Projects

Presently, the date for commencement for commercial operations (DCCO) in respect of loans to commercial real estate projects delayed for reasons beyond the control of promoters can be extended by an additional one year, over and above the one-year extension permitted in normal course, without treating the same as restructuring.

It has now been decided to extend a similar treatment to loans given by NBFCs to commercial real estate. This will provide relief to NBFCs as well as the real estate sector. Force Majeure Clauses are commonly found in contracts which contemplate continuous performance. This clause generally lists what classifies as events outside the control of the performing party and if such an event occurs which restricts the performing party from completing its contractual obligations, the performing party is excused from those obligations.

However, in the absence of any specific clause relating to Force Majeure, the parties have an option to look at Indian Contract Act, 1872 for appropriate legal recourse. The parties while invoking Section 56 of Indian Contract, 1872, in the absence of Force Majeure Clause, will have to show that the event (in this case COVID-19) has changed the fundamental basis of the contract thereby making it impossible to perform.