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Loan Moratorium- Real Estate, Power Sectors Not 'Persons Affected By Disaster' For Relief In Loan Repayment: Harish Salve Tells SC

Mehal Jain
16 Dec 2020 3:15 PM GMT
Loan Moratorium- Real Estate, Power Sectors Not Persons Affected By Disaster For Relief In Loan Repayment: Harish Salve Tells SC

In the course of the loan moratorium hearing on Wednesday, it was urged on behalf of the Indian Banks Association that because of the court's directions, people who had no hope of debt-restructuring are now enjoying because their accounts cannot become NPA, and hence, the moratorium must now come to an end.The bench of Justices Ashok Bhushan, R. Subhash Reddy and M. R. Shah heard Senior...

In the course of the loan moratorium hearing on Wednesday, it was urged on behalf of the Indian Banks Association that because of the court's directions, people who had no hope of debt-restructuring are now enjoying because their accounts cannot become NPA, and hence, the moratorium must now come to an end.

The bench of Justices Ashok Bhushan, R. Subhash Reddy and M. R. Shah heard Senior Advocate Harish Salve for the IBA.
Resolution to be at the instance of banks and norms cannot be applied uniformly
"What is resolution by the banks? Both Dr. Abhishek Manu Singhvi and Mr. V. Giri for the RBI have said that resolution is the right of the borrower and not the bank...Your Lordships are aware that the NPAs of the banks had reached threatening proportion. At that time, the IBC was brought....Banks would always takes steps to rectify the loans which have fallen bad and commercial banks all over the world do that. This is what is called resolution. The banks have their own norms for restructuring of the loans, which the Kamath Committee has now relaxed. The heart of the resolution plan is that the borrower should be able to repay his debt if his immediate obligations are deferred", he explained.
"It was argued that the pandemic has brought about frustration, so the borrowers have been relieved from paying the loans back. But the fundamental aspect of frustration has been overlooked. If you argue frustration, be ready for the logical consequence. There will be restitution", he continued.
"There is a phrase called Debt Coverage Ratio (DCSR). It means that the amount of cash flow should be such that it can cover the debt. Kamath indicated, sectorally, what reforms banks should adopt in the restructuring. To suggest that it should be left to the borrower to decide whether the debt is resolvable or not is unstateable. It is for the lender to decide whether the situation can be resolved or whether bankruptcy has to be proceeded with. The downside of Your Lordships' interim order is that the businesses which have gone flat, by their own reasons or on account of the pandemic or because of a little of both, their accounts can't be declared bad. Resolution is a restructuring of the debt and the banks cannot uniformly apply norms", submitted Mr. Salve.
He advanced that even though the SBI has majority government share, it is a listed company; that banks are listed companies with private shareholders. He explained that when we see banks and government as seamless, in asking banks to write off debts, we are actually asking the government to write them off. When banks give relief, it is the government which supplies them the money that they lose. "Asking the court to judicially review, it is not correct.The challenge to the resolution packages of the banks is misconceived", he argued.
'People affected by disaster'
As regards the larger issue of what are the rights which can be enforced as regards borrowers generally or any specific sector, Mr. Salve urged that this proceeding has metamorphosised from a public interest litigation to nudge the government to help people who are jobless and have zero cash flow to large commercial interests. "Your Lordships have an application by the CREDAI, asserting that the real estate market had met the pandemic under unfavourable market conditions, and further damage has been caused by Covid. Has any material been placed on record to show how wobbly their house was before? No. It is claimed that the real estate sector has been brought to a standstill by the lockdown as there was no possibility of any work from home. But during lockdown I and II, every industry was closed. They have spoken of the nonavailability of sufficient labour and the reduced purchasing power of the banks. This is way beyond relief for any disaster!", he contended.
"The economic sentiment is such that if I have money in the bank, I don't want to invest it but I want cash-in-hand. Restaurants say that they are open but the customers are running away. The shopkeepers say that the mood is sombre despite the festive season. Does disaster management say that because people are spending less, cheques should be written to everybody by the government? Is this a case where your house has been swept away? Or where a road has broken?", he argued.
"But there is a special provision in section 13 (of the DM Act, 2005). The government has to consider everything and allocate money for everyone. But when there is a special provision…?", asked Justice Bhushan.
SG Tushar Mehta interjected to submit that section 13 has been considered by the government, and that for good reason, the government did not find it possible or permissible or in public interest. 
"Section 13 does not let them off the hook. Section 13 provides for recommendation by the National Disaster Management Authority of relief as regards repayment of loans or for grant of fresh loans to persons affected by the disaster on concessional terms. Government may scale down the interest or capitalise interest, I understand that, but who are these 'people affected by the disaster'? These are the Tier 1 people, who have suffered as the immediate consequence of the disaster, and not the Tier 2 and Tier 3 people, who are the result of the culmination of the problem", he replied.
He cited as example the terrible earthquake of Gujarat, on account of which not only the businessmen based in Gujarat and their employees, but also their business compatriots outside the affected area- the suppliers in Maharashtra, Punjab and Tamil Nadu, who were in business with the tradesmen in Gujarat, were affected. "So there are layers of the impact...Your Lordships were hearing 32 petitions by homebuyers long before the pandemic. There were Unitech and Amrapali and Jaypee, who threw up their hands in the air and said 'the market is dead, what should we do'. If you're already fragile, then a small wind may also be too much to tip over. That is not the effect of a disaster", he contended.
"If there are floods in Uttarakhand, the Northeast, Bihar, you may say 'write off the interest' or securitise the interest. But can this be applied uniformly to all? Can it be challenged that the government packages be struck down as violative of Article 14? No! The CREDAI or the real estate companies are not 'persons affected by the disaster'. The economy was bad, the customers had gone, the liquidity had gone. It is worse now because the economy is contracting by 8%. People are not paying taxes because they don't have money and also because the incomes are zero. Shops are closing so there is no question of any GST. Advance budget of the government has gone awry!", argued Mr. Salve.
"There is nothing in the DM Act which informs the court or which informs the system that there can be adjustment of equities by executive fiat", suggested Mr. Salve.
"Home delivery has done better than ever. Netflix has become $1 billion company. Furniture business is thriving. However, all restaurants have become zero. You win some, you lose some. You can't by an executive fiat direct that the ones who are doing well pay the ones who are not. Your Lordships have been asked to ask the banks to write off loans, extend the moratorium. So why not ask the businesses which are doing well to pay those which are not?", contended Mr. Salve.
"In dealing with the CREDAI, can Your Lordships say that if their voice is not heard, the court will intervene. Powerful interests of builders will have a voice which will not be heard? I find it hard to believe", he advanced.
Statutory Framework under the Disaster Management Act is inclusive and not exclusive
"What is the government expected to do?", asked Justice Reddy.
Mr. Salve explained that the government must address the problems of everybody who is affected and not just the three sectors which happen to be before the court- "There are jobless labourers, so it is the responsibility of the government to provide them social security. There are people in the hospital, so the government in a welfare state must ensure that they are attended to. There are people whose business has changed, so the government must see what it can do for each business. Britain came out with a furlough scheme – if you let go of your employees, we will only give them £2500 as against the £10,000-£12,000 which they were initially making. They said we are not hearing eviction cases because we know that the tenant cannot pay the rent"
"The issue which lies at the heart of the matter is the construction of the Disaster Management Act. The DM Act creates an architecture for government action in the matters of disaster, both for prevention and mitigation. The statutory framework of the Act is inclusive and not exclusive. The fundamental duty of good governance is not encapsulated by the law. If something is not written within the law, it can't be said that it should not be done. The readjustment of private rights is also not provided in the Act. So if there are 5 companies which are doing well and there are 15 others which are not doing well, should the former give loans to the latter? This is what Your Lordships are being invited to do", advanced Mr. Salve.
Mr. Salve submitted that there was a time when there used to be talks of growth rate, but, as per a Moody's report, India might be doing better than expected because the "shrinkage has dropped". He advanced that is a tricky situation, where every government, including those of the affluent countries like the US, is grappling, but the government must do something for every sector. "The taxpayers have been asked to file returns later. They may even be given relief later. But you need money from the taxpayers to spend money!", he remarked.
He expressed the stand that the government must look at the power and real estate sectors but its duty is not exhausted by the DM Act, that it is responsible for bringing the economy back on its feet, and that it will even have to take macro economic measures towards this end. "Why has the power not been vested in the NDMA to decide as regards that the relief in repayment of the loan or grant of fresh loans? Ultimately, the management is to be left to the Ministry of finance and the RBI. This is because the loans are at multiple levels – banks, Non-Banking Financial Institutions, state financial institutions, building societies etc. The width of the NDMA is limited. That is why the term 'recommend' has been used. The power has been created to cut down the federal structure. Nobody can say that I am from a particular state so you can't tell me what to do", he explained.
"The NDMA has applied its mind to 13. They said the RBI has done so and so, they saw that the moratorium effect on the borrowers vis-a-vis the lenders has been balanced, they saw the resolution framework, the relief measures of the government were looked into. The recommendation is that the relief for the eligible borrowers is already available. They said that 13 has been worked out. There is nothing more to do. We can't recommend anything more", advanced Mr. Salve.
"Please see section 13 again- 'disasters of severe magnitude'. Restructuring is also relief for the purpose of section 13. Various plans are contemplated", observed Justice Bhushan.
Mr. Salve replied that relief is a word of width, that it can be understood in four ways – elimination of the burden of interest for a period; capitalisation of interest, so that there is no interest on interest; relief on the rate of interest, that is, scaling down the rate of interest; and moratorium for repayment.
"They (NDMA) considered each of these elements. The SG's written submissions state that they looked at 13 and had that in mind. It reads that moratorium is for the purpose of mitigating the burden of debt servicing and deferring interest on working capital loans. Then there is the other solution where accounts do not become NPA. They recognise that moratorium has a cost. That is why a large number of borrowers didn't avail of it. They recognise that the moratorium affects the banks adversely- What do we do? Forego interest of depositors? We can't do that. Should the public exchequer pay them? They recognise that the banks are expecting rise in the NPAs. 8% shrinkage will lead to bankruptcies galore. What aspect have they failed to apply their mind to?", contended Mr. Salve.
"Must they (NDMA) first recommend and then the authorities should act? No. The architecture of the Act is such that all authorities act simultaneously and parallel to each other. Otherwise, the disaster will overtake India before bureaucratic paperwork is over", advanced Mr. Salve.
He took the bench through the provisions of the DM Act- Section 6 on NDMA which primarily has policy-making power; section 10 on the powers of the National Executive Committee, which provides assistance to the states. Then, there are the State Disaster Management Authorities. He explained that all of these authorities have overlapping powers because they work together and separately. "This is the message of the law", he remarked.
Indicating section 35 on measures by the central government on disaster management, he advanced that the government has to act apart from this law, apart from the NDMA. Under Section 37, every ministry and department of the government of India has been made responsible to prepare disaster management plans. There is a similar provision for the state governments in section 38. Chapter 9 of the Act deals with finances, accounts, audits. A National Disaster Response Fund and a Disaster Mitigation Fund has to be created by the Central government and each state government. Section 49 requires that every ministry of the government of India and each state must have a disaster budget.
"Now there are complaints of being treated badly by the banks. There are millions of borrowers and tens of thousands of employees. Not everybody is polite. In individual cases, there may be problems. It is a service industry", he continued.
"The banks are accepting that they are duty-bound to comply with the RBI and the government directions in letter and spirit. Your Lordships directions are being followed. But there can be no blanket ban against interest to be recovered from everybody. This is wrong. Please close this matter now", he concluded.

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