The grant of grace period for all loans, which is part of the emergency powers granted by Congress to the President, is now set for implementation. On 1 April 2020, the Department of Finance (DOF) issued the Implementing Rules and Regulations (IRR) of Section 4(aa) of Republic Act No. 11469, Otherwise Known as the “Bayanihan to Heal as One Act”. The salient points of the IRR are as follows: 

Mandatory grace period. During the initial 30-day grace period, as may be extended (added: updated classifications), Covered Institutions are prohibited from imposing any interest on interest, penalties, fees and other charges. Of course, the borrower has the option, based solely on his/her/its discretion, to pay the obligations as they fall due during the period of ECQ.

UPDATE: IATF Resolution No. 33 dated 6 May 2020 contains two important revisions:

• The grace period is: (a) 30 days from the last due date; or (b) until such time that the community quarantine is lifted, whichever is longer.

• The grace period covers GCQ and ECQ (added: reverted to ECQ/MECQ per Revised Omnibus Guidelines, as approved in Resolution No. 37; see also updated FAQ of BSP, clarifying that loans with due dates falling on 1 June 2020 and thereafter are no longer entitled to the 30-day grace period).

Period covered by the grace period. The grace period applies when the due date (which means the maturity date of the principal and/or interest, including any amortization or the scheduled periodic payment that is applied to both loan principal and interest) falls within the ECQ Period. The “ECQ Period” means the Enhanced Community Quarantine period from 17 March 2020 to 12 April 2020, but the initial grace period shall automatically be extended if the President extends the ECQ Period.

Covered Institutions. The grant period on loans is mandatory for all covered institutions. As defined under the IRR, “Covered Institutions” include ALL lenders, both private and public, including but not limited to the following:

• banks

• quasi-baks

• non-stock savings and loan associations

• credit card issuers

• pawnshops

• cooperatives which are credit granting financial institutions under the Cooperative Development Authority

• other credit granting financial institutions under the supervision of the Bangko Sentral ng Pilipinas (BSP) and the Securities and Exchange Commission (SEC)

• Government Service Insurance System

• Social Security System

• Pag-ibig Fund

Loans covered. Loans shall mean loans extended by Covered Institutions to individuals, households, MSMEs, corporate borrowers, and other counterparts. In case a borrower has multiple loans, the grace period shall apply to each loan. 

Applicable throughout the Philippines. It would have been helpful if the DOF expressly provided the geographical scope of the IRR. Does it cover the entire Philippines? The IRR makes reference to the ECQ Period under Proclamation No. 929. While Proclamation No. 929 declares a State of Calamity throughout the Philippines, the ECQ Period only applies to Luzon. Nevertheless, we submit that the IRR is applicable nationwide. It covers all loans and all Covered Institutions, without distinction as to location. It is based on the “Bayanihan to Heal as One Act” and its implementing directives, both of which cover the entire Philippines. This liberal interpretation is consistent with the intent and declared policies of the IRR and the applicable law.

[For rents, see Grace Period for Rents (Residential and MSMEs) during the Enhanced Community Quarantine]

Principal, interest, other fees. A grace period, by its ordinary definition, is “a period of time beyond a due date during which a financial obligation may be met without penalty or cancellation.” Under the IRR, the loan obligation becomes due but not yet payable. The amortization (both principal and original interest) are not waived, but simply made payable at a later date. There are three components to consider: (a) principal; (b) original interest; and (c) interest on interest, penalties, fees and other charges.

• It is clear that “interest on interest,” penalties, fees and other charges cannot be imposed during the ECQ Period and cannot be carried over to future payments/amortizations.

• It is also clear that the original interest on the principal (as distinguished from “interest on interest”) is still payable after the ECQ Period. The IRR explicitly provides that the accrued interest — without interest on interest, penalties, fees and other charges — shall be paid by the borrower on staggered basis over the remaining life of the loan. Nonetheless, the borrower has the option of paying the accrued interest in full on the new date following the application of the 30-day grace period or extended grace period, as the case may be. 

• While the principal is still payable, the IRR is not clear as to the manner of restructuring. Can the lending institution unilaterally impose the manner of restructuring? Will the principal be payable on a staggered basis, like the accrued interest, over the remaining life of the loan? Will the term of the loan be extended for the same period corresponding to the ECQ Period? No matter how it is done, it appears that the lending institution cannot add the full amortization to the next month’s amortization, as this will defeat the intent and declared policies of the law. [Added: The last payment will be moved for 30 days. See BSP FAQ]

[See also: COVID-19 Lockdown: Fortuitous Event or Force Majeure Exemption from Obligations]

Collection agencies. It would have been helpful for the DOF to include a provision that collection agencies are precluded from making any calls, at least during the ECQ Period. Still, given that the IRR is liberally construed to ensure the fulfilment of the policy objective of the “Bayanihan to Heal as One Act,” collection agencies cannot conduct collection activities because the loan obligation is not yet payable.

No waivers. Some financial institutions might get creative and require clients to execute waivers of the applicability of the grace period. Anticipating this scenario, the IRR explicitly prohibits Covered Institutions from requiring their clients to waive the application of the previsions of the “Bayanihan to Heal as One Act,” including among others, the mandatory 30-day grace period. No waiver previously executed by borrowers covering payments falling due during the ECQ Period shall be valid. 

Sanctions. To emphasize the mandatory nature of the grace period, the IRR provides that any violation of its provisions shall be subject to appropriate penalties set forth in the Bayanihan to Heal as One Act, as well as existing laws, rules and regulations. R.A. 11469 provides that the refusal to provide a 30-day grace period is a criminal offense, punishable with imprisonment of two (2) months or a fine of not less than P10,000 but not more than P1,000,000, or both, at the discretion of the court.

[See also: BSP FAQ on Grace Period for Loans]