Reserve Bank of India (RBI)
Reserve Bank of India (RBI)
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Loan moratorium is extendable up to two years under RBI's August 6 circular on COVID-19 resolution framework: Centre tells Supreme Court

"A waiver of the interest on interest during moratorium would also be against the basic canons of finance", the affidavit filed by the Centre states.

Shruti Mahajan

The Reserve Bank of India (RBI) circulars on loan moratorium and various other measures introduced during the COVID-19 pandemic adequately address the issues concerning loan repayment and interest on loans, the Centre has informed the Supreme Court.

In its affidavit filed before the Supreme Court, the Centre has elucidated upon the various steps that have been evolved and contemplated by the RBI for different kinds of borrowers and lenders.

This framework of the RBI, along with the many relief measures announced by the Centre for different distressed sectors, address the grievances brought before the Court by petitioners who challenged the charging of interest on loans during the moratorium period.

On the specific question that was posed by the Court to the Centre on waiver of interest on interest, the Centre has made its position clear. The affidavit filed by the Centre says,

"A waiver of the interest on interest during moratorium would also be against the basic canons of finance."
Centre's affidavit filed before Supreme Court

The Centre's reply comes after the Supreme Court had earlier pulled it up for "hiding behind the RBI" and failing to make its own stand clear. Solicitor General Tushar Mehta had, at that time, told the Court that the government's stand would not be adversarial to that of the RBI's.

Building on the same, the affidavit now filed says that relief measures for the financial sector were being supervised by the Finance Ministry. The authorities under the National Disaster Management Act (NDMA) did not step in, considering the fact that they may not have had the expertise to deal with the complex issue of policy decisions that affect the "financial stability of the nation in general and the banking sector in particular."

The Finance Ministry has, since the outbreak of the COVID-19 pandemic, taken various steps to address the potential problems that borrowers could have faced, the affidavit goes on to state.

The government, keeping in view the aspects of the nation's financial stability, potential unforeseen fiancial burden on the exchequer, uncertain nature of the pandemic, implications of the different reliefs granted, and limitation of resources, had taken various measures. These measures were taken to mitigate the financial suffering that could be caused to different sectors, the affidavit elaborates.

The Finance Ministry had remained in touch with the RBI to come up with possible relief measures in light of the fact that the different classes of stakeholders involved could not have been given a "one size fits all" solution.

This, the affidavit says, is due to the variety in the type of borrowers, the difference in nature of lenders, restructuring of loans being different for different types of loans, and a responsibility to ensure financial viability and feasibility of all lending institutions.

RBI's circulars allowing the moratorium was a temporary arrangement and allowed the borrowers a window during which accounts would not become Non-Performing Assets. The payment of installments and interest would be deferred if the borrower had chosen to avail the benefit of the moratorium, the Centre clarifies.

This arrangement, while giving certain benefits to borrowers, also placed some burden on banks and lenders that continued to incur costs on their deposits, the affidavit explains.

"...while the standstill applicable to bank loans results in the bank not getting its funds back during the period of the moratorium, the bank continues to incur cost on bank’s deposits and borrowings. It is respectfully submitted that since a moratorium offers certain advantages to borrowers, there are costs associated with obtaining the benefit of a moratorium."

Further, the affidavit states that the RBI circular dated August 6 addresses various issues and provides the desired reliefs to the borrowers. The Centre has also, over time, announced various relief measures for various sectors hit adversely by the pandemic, the affidavit states.

Opposing the waiver of interest on interest as well as changing the terms and conditions belatedly would not be fair and equitable, the Centre further adds.

"...ex post facto change in the terms and conditions of the offer of moratorium favouring those who availed of it over those who made the extra effort of repaying as per schedule would be grossly inequitable and patently unfair for those who did not avail of the benefits of moratorium initially or gave it up subsequently."
Centre's affidavit before Supreme Court

Detailing the RBI's resolution framework for mitigating the impact of COVID-19, the Centre says that any moratorium provided for has to end at some point. Thus, a more durable long-term solution is required for maintaining the economic and financial health of the nation.

As such, the circular issued by the RBI on August 6, which provides for loan restructuring, takes into account all categories of borrowers and lenders while leaving it open for the lending institutions to decide the nature and kind of relief to be given to their borrowers.

The RBI's August 6 circular allows the banks to provide resolution plans for their borrowers with respect to eligible loans. The affidavit explains further:

"...the resolution plan may involve any action/plan/reorganisation including regularisation of the account by, inter alia, restructuring, which is described as an act in which a lender grants concession to the borrower and which may involve modification in terms of advances/securities, which would generally include, among others, alteration in payment amount/amount of instalment / rate of interest."

Borrowers who fear that their accounts will become NPAs may request to avail extension on moratorium, which the banks are empowered to grant for a period up to two years in line with the RBI's August 6 circular, the Court is told in this affidavit.

Thus, summarising the benefits and "customised relief" that banks and lending institutions are empowered to provide, it is said:

"...with the framework under the RBI circulars dated 6.8.2020 now in place, banks are fully empowered to resolve COVID19-related stress and customise relief to individual borrowers through grant of various concessions in terms of:-

(i) alteration in the rate of interest and haircut on amount payable as interest

(ii) extension of the residual tenor of the loan, with or without moratorium, by up to two years;

(iii) waiving penal interest and charges;

(iv) rescheduling repayment;

(v) converting accumulated interest into a fresh loan with a deferred payment schedule; and

(vi) sanction of additional loan.

In view of these steps by the RBI and the various relief measures taken by the Centre, particularly the Finance Ministry, the Centre submits that the reliefs sought for by the petitioners before the Court stand provided and the grievances adequately addressed.

The Supreme Court is scheduled to take up this case for hearing on Wednesday, September 2.

Read Centre's reply:

RBI loan Moratorium - Centre's affidavit.pdf
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