Hit By #Coronavirus, Indian Firms Cite ‘Act Of God’ Clause Seeking Relief For Loan Repayment; Will It Work?

Hit by the novel coronavirus, or COVID-19, outbreak, real estate, tourism and hospitality companies have sought relief in loan repayments, citing the ‘Act of God’ clause, as per the reports.

Why Would This Happen?

According to sources, the business owners from real estate, hospitality and tourism sectors have approached banks citing the “Act of God” clause in their loan covenants to delay payments and seek a restructuring of past loans.

Basically, “Act of God” is a legal term used to describe events outside of human control and activity, and is invoked if a business is impacted by circumstances such as natural calamity, epidemic or war.

As we can see that travel restrictions over the past month have hurt the tourism and hospitality industries hard. 

Further, the situation worsened after India suspended both international and domestic flights.

Also, yesterday Prime Minister Narendra Modi announced a 21-day lockdown starting from March 25. 

Ultimately, this will force employees across all sectors to stay at home, except those in essential services.

How Did This Happen?

While talking about the coronavirus impact, a banker said “We have started receiving requests from several companies citing “Act of God” clause to restructure loans and provide leeway in repayments. In some cases, these loans are upwards of Rs 200 crore,”.

So, lenders are seeking an industry-wide asset classification forbearance from the Reserve Bank of India (RBI), as the banking industry is in a precarious position.

The Analyst at IndiaNivesh Securities, Ravikant Bhat said, “Lenders are likely to be less affected in Q4, FY20 with the lockdown becoming widespread only in the last week of March this year,”.

“The current lockdown shall affect every business and individual. Hence, the economic fallout shall require a comprehensive package based on the needs of each affected segment,” he added.

How Does Regulatory Forbearance Help?

According to the industry officials, the Reserve Bank of India and the government should be generous with any assistance they may provide to key industry sectors reeling under the total demand collapse caused by the spread of the coronavirus pandemic and the total government-ordered nationwide shutdown.

The senior group vice president, ICRA Ratings, Subrata Ray said, “A regulatory forbearance will definitely help both lenders and aviation companies avert any genuine financial crisis,”.

 “Airlines with a robust liquidity position would be able to sustain meeting repayments on schedules. Regulatory curbs over Covid-19 has triggered significant disruptions,” he said.

Further, ICRA has reviewed the credit risks of aviation companies and has retained the outlook at negative for now.

It will also review the rating if any relief measures are announced by the government.

According to an Icra estimate, the total fund-based aviation industry debt (excluding Jet Airways debt and the capitalization of leases) is pegged at around Rs 40,000 crore.