Loan Moratorium Exceeding 6 Months Will Impact Borrowers' Credit Behaviour: RBI Tells SC, Also Urges To Lift The Stay On NPA Classification

In response to a large number of Writ Petitions making diverse prayers relating to its Circular on Covid-19 - Regulatory Package dated March 27, 2020, and subsequent circulars issued on the matter; and the Circular on Resolution Framework for Covid19-related Stress dated August 6, 2020, the RBI has filed a consolidated reply before the Supreme Court."Reserve Bank of India has taken a balanced view, taking into account the interest of the depositors, borrowers, real sector entities and banks. Financial stability and economic growth of the country were also kept in mind while arriving at its policy decisions by the Reserve Bank. All the issues that were advanced by the petitioners have been adequately addressed. There is no scope for further grievance for the petitioners", it is asserted, addressing the concerns raised as follows:I. MEASURES TAKEN BY THE RESERVE BANK TO ADDRESS THE ECONOMIC FALLOUT OF COVID19 AND THEIR IMPACTIt is submitted that the RBI is cognizant of the enormity of the challenges faced in the wake of Covid19 and accordingly has already announced several measures to mitigate the immediate impact on the real sector as well as financial sector. These comprehensive measures can be classified as under:1. Reduction in Policy Rates 2. Maintaining adequate liquidity in the system for all the constituents;3. Easing Financial Stress for the borrowers; 4. Facilitating and incentivising bank credit flows;5. Supporting Exports and Imports;II. GUIDELINES PERMITTING MORATORIUM ON DEBT REPAYMENTSOne of the first set of measures announced by the Reserve Bank was on March 27, 2020 to alleviate the immediate financial stress on the borrowers in continuing to make repayments on their borrowings. The aforesaid circular dated March 27, 2020 was further modified vide circulars dated April 17, 2020 titled COVID19 Regulatory Package - Asset Classification and Provisioning and May 23, 2020 titled "Covid-19 Regulatory Package" whereby the moratorium period was extended by another three months i.e. from June 1, 2020 to August 31, 2020 on payment of all instalments in respect of term loans (including agricultural term loans, retail and crop loans). Thus, in terms of the above guidelines, a total of six months of moratorium was permitted, which expired on August 31, 2020.Waiver of interest/interest on interest during the moratorium periodIt is submitted that any waiver of interest on interest, or compounding as it is referred to in financial parlance, will entail significant economic costs which cannot be absorbed by the banks without serious dent of their financials, which in turn will have huge implications for the depositors and the broader financial stability. It is pointed that Union of India vide its affidavit dated October 2, 2020 has submitted before the Court the decision of the Government to bear the cost of the 'interest on interest' for MSME loans and personal loans upto Rs. 2 crore. This decision by the Government to provide additional relief to a large segment of borrowers has addressed the primary prayers of the petitioners.Guidelines being discretionary and not mandatoryThe other major issue raised by various petitioners against the moratorium circulars being that these are not automatically available to all borrows but contingent on the discretion of the lenders, it is submitted that the Reserve Bank has only provided an enabling mechanism for the lenders to permit the moratorium, without the same being treated as restructuring of the terms of the loan contract for regulatory purposes. However, since the customer profile and business model of each lending institution is widely different from others, each lending institution is best placed to assess the requirements of its customers. Therefore, the discretion regarding deciding the eligibility of customers and manner in which the customers are on-boarded for availing this benefit was left to the lending institutions concerned. "Providing the discretion to respective institutions in extension of the moratorium/deferment cannot be termed as discrimination or classification", it is argued.Extension of moratoriumVarious petitioners have made a prayer for extension of the moratorium beyond August 31, 2020. In this regard, it is submitted that the moratorium was permitted as a part of immediate regulatory response, aimed at providing temporary reprieve to borrowers affected by the pandemic, while attempting to preserve the resilience of the financial system. It entails significant costs to the lenders and a balance needs to be maintained in the overall consideration. A long moratorium exceeding six months can also impact credit behaviour of borrowers and increase the risks of delinquencies post resumption of scheduled payments.III. RESOLUTION FRAMEWORK FOR COVID19- RELATED STRESSThe Resolution Framework issued by the Reserve Bank on August 6, 2020 is aimed at facilitating revival of real sector activities and mitigating the impact on the ultimate borrowers,...

Loan Moratorium Exceeding 6 Months Will Impact Borrowers' Credit Behaviour: RBI Tells SC, Also Urges To Lift The Stay On NPA Classification

Mehal Jain

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