RBI affidavit rules out further interest waivers, extension of loan moratorium
09 Oct 2020
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Reserve Bank of India (RBI) has filed a fresh affidavit before the Supreme Court in the loan moratorium case, making it clear that it is not possible for further extending the six-month moratorium on repayment of loans for all and that the proposed two-year extension on loan repayment of loans up to Rs2 crore is meant for the weaker sections of society hit hard by the pandemic.
Any extension of loan moratorium period to various industrial sectors may vitiate overall credit discipline and jeopardise banking operations in the country, RBI told the Supreme Court.
In its affidavit, the RBI said that any further extension of the loan moratorium “may result in vitiating the overall credit discipline which will have a debilitating impact on the process of credit creation in the economy”. RBI further said the move can “increase the risks of delinquencies post resumption of scheduled payments” and “exacerbate the repayment pressures for the borrowers”.
The Supreme Court had, on Monday, sought clarity on the government’s response on the loan moratorium and interest waiver demands, saying that its affidavit did not contain “necessary details.” It had asked the centre and the RBI to place on record the K V Kamath committee recommendations on debt restructuring in view of Covid-19 related stress on various sectors and the government’s response so far.
The finance ministry in its affidavit filed on 2 October had stated that it has decided to waive compound interest charged on loans of up to Rs2 crore for a six-month moratorium period in the case of individual borrowers and small industries, in view of the pandemic.
The Supreme Court has taken up the plea by various other sectors like real estate and had asked the government to look for ways to give additional relief apart from what has already been announced. The government, however, told the court that any further concessions are unfeasible.
On the demand for relief by real estate and power sectors, RBI had told the top court that these sectors are already stressed well before the Covid-19 pandemic due to various other factors and these have to be addressed separately.
RBI said the “travails of real sector cannot be solved through banking regulations” as these are structural in nature and the banking regulations cannot solve such issues.
“An account which was impacted by pandemic as well as had a pre-existing financial stress 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,” RBI pointed out.
Also, RBI pointed out that certain issues are specific to the borrower and the lending institution and these cannot be universally applied to all borrowers and lender banks.
“In this context, 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,”
RBI also informed the Supreme Court that its order staying the classification of non-performing asset (NPA) accounts will have huge implications for the banking system if it is not lifted immediately.
The central bank also said that the ruling undermines its regulatory mandate.
RBI had, in March, allowed a three-month moratorium on equated monthly installments (EMIs) of term and other loans that were due between 1 March and 31 May. The moratorium was later extended till 31 August.
The top court, in an interim ruling on 3 September, had ordered a stay on the classification of NPAs—if not declared as such by 31 August—till further orders.
