Daniel Albuquerque analyses aspects of Reserve Bank of India’s (RBI) circular dated 27 March 2020 on loan moratorium which deals with the Non-Performing Assets (NPA) in the banking industry.
Since the moratorium/deferment/recalculation of the ‘drawing power’ is being provided specifically to enable the borrowers to tide over economic fallout from COVID-19, the same will not be treated as concession or change in terms and conditions of loan agreements due to financial difficulty of the borrower under paragraph 2 of the Annex to the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 dated June 7, 2019 (“Prudential Framework”). Consequently, such a measure, by itself, shall not result in asset classification downgrade as per RBI Circular Para 5 [RBI/2019-20/186 DOR.No.BP.BC.47/21.04.048/2019-20] 27 March 2020.
A Case for Moratorium: In the High Court of Karnataka, 8 July 2020, a writ petition No .6775 of 2020 was filed by Velankani Information Systems against seven respondents: 1) Secretary, Union Ministry of Home Affairs, 2) Union Secretary, Ministry of Finance, 3) State of Karnataka, 4) Governor, Reserve Bank of India, 5) HDFC Bank Ltd., 6) Federal Bank Ltd., 7) Aditya Birla Housing Finance Ltd. The petitioner prayed for the respondents Nos. 1-4 to enforce the Regulatory Package announced by the Reserve Bank India. The petitioner also prayed that the respondent No 5 to quash and set aside two of its communicated decisions and also to give it directions, and to respondents 5, 6 and 7 to grant moratorium regarding payment of all term loan instalments which would be due.
The facts of the case are: a) the petitioner is a firm that conducts business in information technology and hospitality sectors; b) the loans are taken from the respondents Nos. 5 to 7 amounting to a total sum of `475 crores; c) all the established norms and institutional formalities of grant of loans were accepted and signed and channelled through respective escrow accounts; d) the Equated Monthly Instalments (EMI) were also duly ascertained and the date for payment of the same were fixed; e) there had been no default in payments; f) the unfortunate occurrence of the Covid-19 pandemic was followed by a series of measures of lockdown by the central ministries, the Reserve Bank of India and the restrictions placed by the State Government; g) a moratorium of three months on payment of all instalments falling due between 01 March 2020 and 31 May 2020 was declared by the RBI circular, accordingly the repayment schedule for such loans as also the residual tenor was shifted across the board by three months after the moratorium period; h) interest would continue to accrue on the outstanding portion of the term loans during the moratorium period; i) the concerned respondents had accepted and formulated conformity with the RBI directives and other authorities, e.g., Ministry of Finance; j) the respondents made submissions saying that they have not deviated from the stipulations and regulations made by the authorities and that their policies have not been refuted by the RBI.
Adjudication: Through video conferencing, the judge passed the order. He observed that the writ petition was filed under Articles 226 and 227 of the Constitution of India which deal with the powers of the High Courts to issue writs and supervise the same into effect, respectively. The Court averred that the petitioner’s prayer relates to the enforcement of statutory obligations thereby making it obligatory for the respondents to implement the same positively. The circular of the RBI to institute loan moratorium is discretionary and temporary. The Court held that in the interest of the public service it is mandatory for concerned authorities and financial institutions to maintain the temporary moratorium period.
Analysis: For an individual who may be paying EMIs for housing loans or for assets such as cars or auto rickshaws it may be beneficial, even temporarily to postpone the burden of monthly repayment. Even for small and medium entrepreneurs it may help lighten the burden to an extent. However, according to statistics the asset stress suffered by the lending banks ranged from approximately 25% to 65%. To crown it, in a moratorium it is not just the accrual of interest that is the trouble but the predicament of interest on interest or also known as compound interest. About this there has been to and forth between RBI-Government and the Apex Court. It has directed to waive the same on loans up to `2crores until 15 November 2020, although it expressed its displeasure in doing so. The Government’s worry is a straight loss of `6,500 crores.
A Case of Scheming and Plotting: In the financial world, it is that manipulative scheme by which one takes undue advantage of a troublesome situation, such as the distressing pandemic at present. On 3 July 2020, the Delhi High Court dealt with three petitions of similar kind, that is, sale of pledged shares to recover debt involving Zee Entertainment Ltd., Dish TV India Ltd and Essel Infraprojects Ltd., whose prayer consisted in pleading to restrain IDBI Trusteeship Services Ltd., from the sale of the collateral, the pledged shares to recover its debts, on the grounds of the exceptional situation due to Covid-19.
The Court applied its mind judiciously and pronounced a very clear verdict by application of the law: “Section 176 of the Indian Contract Act, the discretion is with the pawnee to either sell the pledged goods after issuing notice to the pawner or prefer a suit for recovery by retaining the goods as collateral (ii) the pledger cannot decide when and how and pledgee should exercise its right to sell (iii) if the pledgee exercises its discretion or does not exercise the discretion, no blame can be put on the pledgee, are not contested.”
Whether Loan Moratorium is a Solution: The above two cases present two perspectives: a) It may help those who genuinely need it, such as individuals and small enterprises; b) it can mount problems on those who want to take undue advantage from a troubled situation, such as the present Covid-19. Going beyond the above two classes, there may be both individuals and businesses who can afford to tide over the situation with sensible planning and foresight.
Conclusion: There are always pressures on all players in the complex financial world. It is no surprise that these well meaning entities would prefer an extension of loan moratorium period of three months which has already expired twice thus far totalling into six months to be extended until the year-end. There are even voices that put forward proposals for two years. Often the financial world loses sight of the common man of India – the large suffering masses of India who are the ultimate stakeholders in the enterprise of the country. Their plight may be explained in the famed Aesop’s fable, the Debtor and his Pig. Once upon a time there lived a man in Athens who was in debt and begged the creditor to extend the time of repayment. The creditor refused. Seeing no other way, he took the sow, the only asset he had to the market to sell. He had to tell several lies exalting the ability of the sow in producing numerous piglets. Picture the plight of the migrants during the Covid-19 exodus from the cities to their remote villages in India. They were forced to sell their meagre valuables to pay off their debts, rents and anything that they owed to anyone
