Extension of moratorium beyond six months unsustainable, might vitiate credit discipline and increase delinquency: RBI to Supreme Court

In an additional affidavit filed before the Supreme Court, the Reserve Bank of India (RBI) has submitted that an extension of the loan moratorium introduced in light of the COVID-19 pandemic beyond a period six months is unsustainable and poses a risk to lenders..If the moratorium period is extended beyond six months, the same can also vitiate overall credit discipline, the RBI has told the Apex Court. A long moratorium may affect the credit behaviour of borrowers and pose a risk of delinquency in terms of repayment when scheduled payments are resumed, the affidavit states, underscoring that the impact may trickle down to small borrowers.."It may result in vitiating the overall credit discipline which will have a debilitating impact on the process of credit creation in the economy. It will be the small borrowers which may end up bearing the brunt of the impact as their access to formal lending channels is critically dependent on the credit culture.".Keeping the moratorium going will also not address the more pertinent problems of cash flow and will, in fact, worsen the problems faced by borrowers, the RBI has said. It was on account of these issues that a more sustainable and durable solution to the grievances faced by borrowers was required to be evolved. .RBI's response comes after the Supreme Court, on October 5, sought for an additional affidavit from the banking regulator detailing the steps taken to deal with the grievances of borrowers with respect to waiver of interest during the moratorium. The Court had also directed for the Kamath Committee report - which deals with sector-wise relief for COVID-19 related stress caused to the borrowers - to be placed on record..[RBI loan moratorium] File additional affidavits on sectoral relief; place Kamath Committee report on record: Supreme Court to Centre, RBI.As regards waiver of interest on interest or compound interest, the RBI has said that allowing the same would cause huge economic costs that banks will be unable to absorb "without serious dent of their financials, which in turn will have huge implications for the depositors and the broader financial stability."With the Central government undertaking to bear the costs on account of waiver of compounded interest for small borrowers who have taken loans up to Rs 2 crore, the primary concerns of the petitioners stand addressed, the RBI adds..RBI loan moratorium: Centre agrees to "handhold small borrowers", waive compounded interest for loans of up to Rs 2 crore.RBI has also submitted that it has provided for a resolution framework for loan restructuring in its circular dated August 6, which allows for tailor-made relief to be granted to borrowers by lending institutions based on the individual and specific conditions of the borrowers. This circular stipulates that lenders may allow a further moratorium or provide payment rescheduling, among other measures, for borrowers who have a credible standing vis-a-vis regularity in making payments, RBI has told the Court. The additional affidavit adds,."The reliefs for each borrower can be tailored by banks to meet the specific problem being faced by each borrower depending on need rather than have a broad- brush approach in dealing with the issue.".The regulator adds that it was a conscious policy decision to extend the benefits of the August 6 circular to only those borrowers who were regular with payments prior to the onset of the COVID-19 pandemic. Therefore, only accounts classified as "standard", and which did not have overdue payments for more than 30 days as on March 1, 2020, were made eligible for availing the resolution framework. This difference in classification is made on "intelligibe differentia" and is reasonable, the RBI argues.Explaining and justifying the rationale behind the differentiation, the RBI says,."An account which was impacted by pandemic as well as had a pre-existing financial has a different risk profile as compared to an account without pre-existing stress and to treat both borrowers on equal footing would be gross suspension of economic sensibilities.".The August 6 circular and mechanism for resolution framework gives discretion to the lenders to provide reliefs based on their assessment of each account. This sufficiently takes care of the "sector-wise" relief that was sought by several petitioners, RBI says. It has highlighted that this discretion would factor in the sector-specific requirements of the accounts and borrowers.."Resolution plans are ultimately commercial decisions of the lending institutions which cannot be mandated through regulations of RBI," the affidavit says..The real estate and power sectors have faced stress since before the onset of the COVID-19 pandemic, the RBI says in response to the calls made by associations from these industries for sector-wise relief. To address their concerns, the Centre has already brought in several measures, the affidavit says. It is added these are structural problems and grievances that cannot be solved through banking regulations..Furthermore, on September 3, the Supreme Court had restrained banks from classifying any of the loan accounts as Non-Performing Assets (NPAs) till further orders after a fervent plea to this effect was made by the counsel for an association of real estate developers. .Accounts not declared NPAs as on August 31 should not be declared NPAs till further orders: Supreme Court passes interim order.The RBI, after having detailed all the steps taken for granting relief to the borrowers, prays for the lifting of this stay on account classification with immediate effect. The affidavit states,."If the stay is not lifted immediately, it shall have huge implications for the banking system, apart from undermining the regulatory mandate of the Reserve Bank of India.".RBI concludes that with all the steps taken thus far, the grievances of the petitioners stand addressed, and thus the petitions deserve to be dismissed for being devoid of merit..The Court will hear the case next week.