RBI Must Monitor Implementation Of Loan Moratorium Circular; Borrower Entitled To Seek Moratorium As A Matter Of Right For Continuity Of Business : Karnataka HC

The High Court of Karnataka has held that a borrower is entitled to seek loan moratorium on the basis of the Reserve Bank of India's March 27 circular, on the ground that the non-grant of it would affect the continuity of buisness.

While acknowledging that the grant of moratorium as per the RBI circular is the discretion of the bank, the Court stated that it is "mandatory" for the banks to ensure that continuity of business is not affected due to the non-grant of moratorium.

"...though the Circular issued by the RBI dated 27.03.2020 is discretionary in so far as the power to grant or not a moratorium by a bank, it is mandatory for the Bank to ensure the continuity of viable businesses, in that, the non-grant of a moratorium should not result in adversely affecting the survival and continuity of a viable business", observed a bench of Justice Suraj Govindaraj.

The Court added that borrowers can seek the moratorium as a matter of right if they could establish that the growth and continuity of their business would be affected.

"All borrowers are eligible to seek for a moratorium, if a borrower were to seek for grant of a moratorium on the ground that continuity of its business would be affected and establish the same, the borrower would as a matter of right be entitled for the grant of moratorium so that such continuity is not adversely affected", the bench added.

The court also directed the RBI to monitor the implementation of the Circular, including verification of whether there are Board-approved policies formulated by each of the lenders, direct all the banks to submit the Board-approved policies for approval to the RBI, to approve such board-approved policy, verify if such a board-approved policy contains objective criteria, and to set up a proper and effective grievance redressal forum for any aggrieved borrower to approach on account of the improper or non-implementation of the Policy and/or Circular etc.

"A perusal of the Circular indicates that permission is granted to the banks concerned to grant moratorium of three months as regards the payment of all instalments falling due between March 1st 2020 and May 31st 2020", noted the bench. It deciphered that the permission is one which is accorded to a bank or lending institution to permit a moratorium, is on account of the fact that without RBI permitting the same, a bank of its own accord is prohibited from granting any moratorium to a borrower.

The Bench observed that the discretion to grant such a moratorium is that of the bank on the basis of a Board approved Policy containing objective criteria made available in the public domain.

"The consequence of such grant of moratorium is covered by the second part of Para 2 which states 'The repayment schedule for such loans as also the residual tenor, will be shifted across the board by three months after the moratorium period'", noted the Court.

Besides, it reflected that the Circular more particularly Para 2,4 and 8 would have to be read along with the statement of development and regulated Policy released by the RBI on 27.03.2020, which inter alia addresses the stress in the financial condition or rather distress caused to the economy by Covid-19 inter alia to ensure the continuity of viable businesses.

"Thus, the exercise of discretionary power by the Bank or lending institution is predicated on ensuring the continuity of the business of a borrower. The decision of the Bank or lending institution if, were to, fall foul of this intention, then that decision would be contrary to the Policy as also the Circular", inferred the bench.

The bench took the answers to FAQs, as posted online by the various banks, to indicate that all corporate, as well as SME customers, are eligible for a moratorium and it is for the customer to choose whether to avail a moratorium, that is, to say that the offer for a moratorium having been made by the Bank, it is for the customer to accept the moratorium by choosing to do so and making an application in that regard. Once such a choice is made and an application was submitted, the rest of the process is automatic.

"Once the banks have in the public domain on their respective websites expressed their solidarity with all their customers and stated that all the customers are eligible for grant of a moratorium, in accordance with RBI guidelines, it is not permissible for such banks to nit-pick and later on, refuse the grant of a moratorium, to the Petitioner, who is otherwise eligible", remarked the bench.

The Court said that both the RBI and the banks have held out that all customers are eligible for a moratorium. The availing of or otherwise of the moratorium is at the sole discretion of the borrower more so when the borrower would be required to make payment of additional interest, during the said moratorium period. There being no waiver of interest and or the principal amount by the mere grant of a moratorium.

"Thus, though the Circular issued by the RBI dated 27.03.2020 is discretionary in so far as the power to grant or not a moratorium by a bank, it is mandatory for the Bank to ensure the continuity of viable businesses, in that, the non-grant of a moratorium should not result in adversely affecting the survival and continuity of a viable business", ruled the bench.

Can a request made by a borrower be rejected by a lender on the ground that the loan of the lender is structured and therefore, the lender can recover the amounts due on the making of such structured loan like an Escrow account?

"I hold that Circular is applicable to all loans/advances and facilities extended by a lending institution, including structured loans", declared the Judge.

Where multiple banks are involved in a loan transaction, can one Bank deny the extension of moratorium, when another is willing to extend the benefit of a moratorium?

"Once all the eggs are taken away by Respondents No.5 and 6, the default as regards the loan to Respondent No.7 would automatically result in the classification of the loan account of the Petitioner with Respondent No. 7 as an NPA, thus in effect killing of the golden goose", articulated the bench.

It proceeded to rule that the Respondents are required to ensure the survival and continuance of the Petitioner and its business.

"Thus, I'am of the considered opinion that one Bank cannot deny the extension of a moratorium, when another or others are willing to extend the benefit of a moratorium", the court held.

Case Title : Velankani Information Systems Ltd vs Union of India and others.

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