On March 27, 2020, the Reserve Bank of India [RBI] governor, Shaktikanta Das announced a comprehensive action plan to resuscitate the economy devastated by the Corona virus. Apart from measures to inject liquidity in the financial system, increase in availability of credit and reduce the cost of capital, the plan sought to ease the stress of loan repayments on businesses and individuals. Amongst others, this includes 3-month moratorium on payment of installments in respect of all term loans outstanding on March 31, 2020.
Even as the lockdown continued much longer than it was initially envisaged [there were three extensions after the first phase announced by Prime Minister, Modi on March 24, 2020] on May 22, 2020, the governor announced extension of the moratorium for another three months till August 31, 2020. Das also allowed borrowers leeway to pay accumulated interest during the 6 month period [March 1 – August 31, 2020] by March 31, 2021.
The RBI has also eased asset classification norms for all accounts where moratorium or deferment has been applied. This means that all accounts covered under the moratorium from March 1 to August 31, 2020 will be treated as non-performing assets [NPA] from 270 days overdue instead of 90 days overdue as per extant rule [this will come at a cost to the banks who will be required to make additional 10% provisioning on these ‘standstill’ accounts over three quarters ending March 2020 and June 2020 and September 2020].
Furthermore, the banking regulator has extended the 210-day resolution period for all large stressed accounts identified under its June 7, 2019 circular [on its expiration, if banks are not ready with resolution plan, insolvency proceedings are initiated under the Insolvency and Bankruptcy Code (IBC)] by a further 180 days – being equal the moratorium period allowed for servicing the loans.
In an affidavit submitted to the Supreme Court [SC], RBI has clarified that the final decision on loan moratorium process has been left entirely to banks’ discretion. In other words, the banks have got full flexibility which could include further extension of the moratorium period depending on how the situation unfolds.
The RBI has thus shielded all Covid – 19 affected businesses from the going into default and all its negative consequences such as loan becoming NPA or proceedings under IBC. It has also eased the burden of paying back accumulated interest for the moratorium period. There could not have been a more generous relief package.
Yet, this has left borrowers dissatisfied and some of them have even gone to the SC which is hearing a public interest litigation [PIL] by an Agra resident, Gajendra Sharma, ‘who demanded a waiver on interest charged by a private bank citing the relief given by the RBI on the payment of equated monthly installments [EMIs] during March and August 31, 2020 due to pandemic’.
Taking exception to banks levying interest on the loans, a three-member SC bench on June 4, 2020 observed “On one hand, you are granting moratorium (on loans) but continuing with interest. It is more detrimental.” The observation came a day after RBI submitted its response while opposing Sharma’s plea and clarifying that the moratorium announced by it [on March 27 & May 22, 2020] was actually a deferment of existing and current liabilities which the petitioner had misinterpreted as a waiver.
Which way, the proceedings will go and what will be its order [for now, the matter is listed for next hearing on June 12, 2020 by which time, the Centre and RBI are required to submit a joint a response], only time will tell. Meanwhile, the observation by the bench is disconcerting. From its tenor, unless SC changes its thought process, we can’t rule out the possibility of pronouncing its verdict in favor of granting interest waiver. This will not only be unfair and discriminatory but set a dangerous precedent.
At the outset, as the RBI has clarified beyond any doubt, what it has allowed is ‘deferment of existing and current liabilities’. Put simply, it means that for now, keeping in view the prevailing circumstances the borrower need not pay. However, as and when the situation improves, he/she will have to pay. But, the petitioner is interpreting it as if the liability stands extinguished; that he need not pay interest at all for the moratorium period. And the Hon’ble judges seem to be concurring with him when they opine:-
“On one hand, you are granting moratorium (on loans) but continuing with interest. It is more detrimental.”
There is an inherent flaw in equating moratorium with waiver of the liability [read: interest]. Putting it differently, the bench appears to be giving an impression that sans interest waiver, granting moratorium is meaningless. Are we to believe that deferment of a liability per se is no relief at all? That is bizarre.
If, someone is passing through a difficult phase [say, in case of this petitioner whose shop remained closed during the lockdown] and he is exempted from having to pay the EMI during this period which is what the RBI has done, this by itself is unquestionably a big relief. While, he will be too happy to get interest waiver as well but that does not take away from the fact that he got a huge relief.
Clearly, granting interest waiver [in addition to deferment] is totally unjustified, unfair and discriminatory. As per figures reported by the State Bank of India [SBI], over 80% of its retail borrowers did not avail of the moratorium for 2 out of the first 3 months [read: March – May, 2020] initially allowed by RBI. Further, 90% of such borrowers did not avail of the moratorium for one month. In other words, they not only continued to pay the EMI, they also had no qualm in paying interest during this period.
If, the top court decides to grant interest waiver, are we then to infer that millions of those who have already paid their EMIs [including interest component] will get refund from the bank? If, they don’t then we will end up with two sets of borrowers [both impacted by lockdown] viz. one who availed of moratorium and get interest waiver too and second, who got neither. This will be outright discrimination.
Look at the impact on banks. According to an estimate, outstanding loans worth Rs 4000,000 crore would qualify for the six month moratorium allowed by the RBI. Taking average lending rate @10%, the interest cost for 6 months works out to about Rs 200,000 crore. This will be the loss to banks if the SC allows interest waiver in the moratorium period [RBI has highlighted this in its submission saying it will dent the business of banks and the stability of the financial institutions].
The banks lend using the money of depositors. If, the former suffer a loss on account of having to grant interest waiver to borrowers, this will impact the latter by way of reduction in the deposit rate [the possibility of depositor even losing their money is not ruled out i.e. in case the bank goes into dire financial straits]. To give relief to a certain section of the society [read: borrowers] at the cost of another [depositors] will be unfair and discriminatory.
Much ado is being made about ‘health versus profitability of banks’. Those obsessed with plight of borrowers argue that in these times, health of people should take precedence over banks’ profitability. This is narrow thinking. The banks’ finances can’t be seen in isolation; if these are eroded [courtesy, interest waiver], depositors get impacted. There are millions of depositors who depend solely on interest income for their survival. Already, in a declining rate scenario, they have suffered due to cut in deposit rate. Is it anyone’s case that they should be made to suffer even more?
Finally, there is need to ponder as to why should an affected person look at the government for a complete bail out in times of crisis. As the adage goes, one always saves for the rainy day. Indeed, a middle-class [or even lower middle class] normally does that. Why can’t he/she draw upon those savings to tide over situation like this [and let state use scarce resources for helping the poor only]?
Hopefully, the SC will see the flaw in allowing interest waiver for the moratorium period [even so, there are millions who have not availed of this relief] and dismiss the demand made by petitioner in the PIL. What the RBI has already granted is a substantial relief and should go a long way in alleviating the concerns of the retail borrowers.