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03 Jun 2020

Refinancing Amid COVID-19 Crisis – A Silver Lining!

Refinancing Amid COVID-19 Crisis – A Silver Lining!

Nand Gopal Anand (Partner, Juris Corp)          Harshit Dusad (Associate)             Vrindesh Patel (Associate)

1) COVID-19 Crisis – Taking the Global Economy for a Toss

Today, with the world tackling the ‘COVID-19’ crisis, most countries have imposed a nationwide lockdown, albeit with certain relaxations. While this step may have, to some extent, assisted in curtailing the spread of COVID-19, it has also resulted in shutting down of factories, putting a temporary embargo on imports and exports, etc. This in turn has resulted in business houses facing liquidity crunch globally. India too, is under a nationwide lockdown since 24th March 2020. Due to the lockdown, myriad industries across a wide array of sectors have not been able to break-even, though, they continue to make payments towards their fixed costs, viz. rentals, salaries, EMI payments, license and other fees, maintenance costs, taxes, etc.

In order to sail through this hard time, companies are taking various steps to minimise their costs. These steps include pay-cuts, laying off employees, availing financial assistance, selling off a part of their stake in their business, etc. To provide further relief, the Reserve Bank of India (“RBI”) had asked all lending institutions to provide their customers, with a moratorium on repayment of term loans and deferral of interest on all working capital loans, for an initial period of 3 months (effective from 1st March 2020). However, as the economic situation continued to deteriorate, the moratorium period was further extended by the RBI for a period of another 3 months (i.e. up to 31st August 2020).

India’s Ministry of Finance has, under the leadership of Smt. Nirmala Sitharaman, also made certain announcements to provide relief to industries amid COVID-19 and the nationwide lockdown. Though, these steps have been appreciated by the stakeholders, these measures may not be enough for some sectors, such as textile, aviation, real estate, hospitality, food, tourism, etc., where the impact has been humongous. Looking at the current situation, a staggered revival is being perceived in these sectors, as consumer demands may see a bearish trend for a couple of months. According to some studies, during the current financial year, the Indian real estate sector is expected to see a revenue loss of USD 1 Trillion[1] whereas the Indian hotel sector may see a revenue loss of USD 8.85 Billion to USD 10 Billion[2]. CARE Ratings has also stated that the Indian tourism sector may have to take a plunge of approximately INR 1.25 Trillion during the current year[3]. As a result, entities in these sectors may struggle in meeting their regular costs, including making payments towards their loan repayment obligations.

Looking at the situation, though the government is continuously working towards formulating a framework for revival of the economy, the companies are also looking at options that may help them in their survival. One such viable step for companies is opting for refinancing of their existing loan facilities.

2) Refinancing – The Basics Explained!

Refinancing is financing of a loan asset of a bank through liability raised from refinancing agencies[4]. In simple terms, it is the act of availing a fresh facility in order to repay an existing facility. Usually, borrowers refinance their existing facilities in order to enjoy more favourable terms as compared to the existing facility. Such favourable terms may be in the form of better interest rates, longer maturity period, better covenants, diluted security package, etc. Although, the law does not classify refinancing into multiple types, however, based on the outcome and objectives of refinancing, market participants have classified it in the following types[5]:

(a) Rate and Term Refinancing: This is the traditional type of refinancing wherein the existing facility is repaid from the funds availed under a fresh facility, having a lower rate of interest and / or a longer maturity period. In common terms, it is substituting an existing loan with a fresh loan.

(b) Cash Out Refinancing: This type of refinancing is available for those credit facilities where the market value of the underlying secured assets has turned bullish. Accordingly, the borrower leverages the increased market value of the underlying secured assets for availing a fresh credit facility of a higher amount. This fresh facility can then be partly used for repaying the existing loan and partly for other purposes of the borrower.

(c) Cash In Refinancing: As the name suggests, in a Cash In Refinancing, the borrower refinances its existing credit facility partly way by of availing a new credit facility of a lesser value and partly by using funds from its own sources. The new credit facility (which is of lesser amount) helps the borrower in achieving a better loan to value ratio of secured assets and consequently reduced EMIs and favourable terms.

(d) Consolidation Refinancing: When a borrower avails a fresh facility from a lender for repaying the existing facilities availed by it from multiple lenders, it is known as consolidation refinancing. Usually borrowers opt for such refinancing where it becomes difficult for them to comply with different terms and conditions imposed by the multiple lenders. Such refinancing also eases the maintenance of books of account of the borrower and makes it easier for the borrower to keep a check on the required compliances.

3) RBI’s Lookout on Refinancing

RBI, the Indian central bank has the power to regulate all banking related activities in India, including refinancing. Though, Indian banks are free to permit refinancing of credit facilities, there are directions prescribed by the RBI in this regard, which are as under:

(a) Refinancing shall not result in evergreening of an existing loan, i.e. back-to-back refinancing of loans. RBI has directed banks for not involving themselves in evergreening of stressed loan accounts. Instead, classify all such loan accounts as non-performing assets, in line with the applicable asset classification norms.

(b) In case a borrower under a ‘financial difficulty’ avails any credit facility (in form of borrowings or export advances) from Indian banks (including facilities credit enhanced by Indian banks) for the purpose of refinancing any existing credit facility, such act shall be akin to restructuring[6]. Any restructuring shall be dealt with in accordance with the applicable RBI regulations.

(c) All loans availed by a borrower from foreign lenders by way of external commercial borrowing route can be refinanced, subject to the conditions stipulated under the extant regulations relating to external commercial borrowings.

(d) RBI also notifies certain restructuring schemes from time to time (for instance RBI’s Scheme on Refinancing of Project Loans, Export Credit Refinance Scheme, etc.). All credit facilities falling under such schemes shall be refinanced subject to the specific conditions stipulated by the RBI.

4) Refinancing under the COVID-19 Regulatory Package

As a part of the RBI’s COVID-19 regulatory package, certain refinancing facilities for All India Financial Institutions (“AIFIs”) were also announced. These facilities shall be utilised by AIFIs for on-lending to the economic entities. Such refinancing facilities are as under:

(a) The National Bank for Agriculture and Rural Development has been provided with (i) INR 25,000 Crores for refinancing regional rural banks, cooperative banks and micro finance institutions, and (ii) INR 30,000 Crores to support rural cooperative banks and regional rural banks for refinancing of crop loan requirements;

(b) INR 15,000 Crores has been provided to Small Industries Development Bank of India for on-lending / refinancing purposes; and

(c) INR 10,000 Crores has been provided to National Housing Board for extending liquidity support to the housing finance companies.

5) Refinancing Amid the COVID-19 Crisis – A Train to Catch!

While the Government of India and the RBI have announced various measures to assist in the economic revival, banks and financial institutions are hesitant in extending new credit facilities to market participants. The primary reason for this is the uncertainty that is looming over the market, due to which it is difficult to envisage whether the industries in a particular sector will sail through these hard times or will they sink in the COVID-19 storm.

To tackle this, the RBI has, on 27th March 2020, reduced the repo rate from 5.15% to 4.40%. Further on 22nd May 2020, the repo rate was again reduced to an all-time low of 4.00%. Consequently, the reverse repo rates have also been reduced significantly. With this step, the RBI has clarified its position that it wants all lending institutions to lend more and infuse liquidity into the market instead of keeping it with the RBI as deposits. With these significant steps and the other refinancing schemes announced by the RBI, this, in turn, is a great prospect for corporates and other borrowers, who want to avail new credit facilities or get their existing credit facilities refinanced at lower interest rates.

Though, until the lockdown continues, companies will have to make payments towards their fixed costs after having zero or low levels of income, they shall take benefits of the announcements made by the RBI and the Government of India. In these difficult times, refinancing may be a blessing in disguise that will not just help companies financially during the COVID-19 crisis (by making finance available at low costs) but also after the crisis is over. Such an opportunity is surely something that should not be missed!

[1] KPMG’s report titled “COVID-19: React, adapt and recover – The new reality”, available at: https://bit.ly/3d0SQFV

[2] HVS’s and Anarock’s report titled “COVID-19: Impact on the Indian Hotel Sector”, available at: https://bit.ly/3ekVJC1

[3] As per the statement given by CARE Ratings to Business Standard, in their news report dated 29th April 2020, available at: https://bit.ly/3gspnai

[4] Technical Guidance Note on XBRL Returns – Harmonization of Banking Statistics, available at: https://bit.ly/2LVNCiU

[5] Refinance by Alexander Twin, Investopedia, available at https://bit.ly/3grwW0I