The Reserve Bank of India has told the Supreme Court that continuation of the loan moratorium period beyond the six months already granted may affect overall credit discipline, and small borrowers will eventually feel the pinch.
The central bank has also urged the apex court to lift its interim order staying declaration of accounts as non-performing assets (NPAs), saying this will have “huge implications for the banking system, apart from undermining” its “regulatory mandate”.
In a fresh affidavit filed in the Supreme Court, which is hearing a plea on the question of charging interest on interest for loan repayments during the moratorium period, the RBI said “a long moratorium exceeding six months can also impact credit behaviour of borrowers and increase the risks of delinquencies post resumption of scheduled payments. 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”.
RBI worry: its mandate and banking system
RBI has argued against extending the loan moratorium beyond six months, and has also asked the Supreme Court to lift the stay imposed on declaring accounts as NPAs beyond August 31. The RBI is of the view this will have huge implications for the banking system and also undermine its regulatory mandate.
A more “durable solution”, the RBI said, is provided by the Resolution Framework for Covid-19 related Stress, announced by it on August 6, which “enables the lenders to implement a resolution plan in respect of personal loans as well as other exposures affected due to Covid-19, subject to the prescribed conditions, without asset classification downgrade. The framework, inter alia, permits extension of the moratorium by a maximum of two years”.
Earlier, the Union Finance Ministry, in its affidavit, had told the court that the government had decided to waive interest on interest in respect of MSMEs and other personal loans up to Rs 2 crore during the six-month moratorium period.
The RBI said “continuation of temporary moratorium” beyond the six month period already allowed “would not even be in the interest of borrowers. It may not be sufficient in addressing deeper cash flow problems of the borrowers and in fact exacerbate the repayment pressures for the borrowers”.
“Therefore, a more durable solution was needed to rebalance the debt burden of viable borrowers, both businesses as well as individuals, relative to their cash flow generation abilities. It was with this consideration in mind that the Reserve Bank has announced the Resolution Framework for Covid-19 related Stress (“Resolution Framework”) on August 6, 2020,” it said.
On September 3, the Supreme Court had directed that accounts which have not been declared as NPAs as of August 31 should not be declared so until further orders.
The RBI urged the court to “immediately” lift this “across the board stay” because if this is not done “it shall have huge implications for the banking system, apart from undermining” its “regulatory mandate”.
The RBI said it “has taken a balanced view, taking into account the interest of the depositors, borrowers, real sector entities and banks. Financial stability and economic growth of the country were also kept in mind while arriving at its policy decisions by the Reserve Bank”.
It pointed out that as per the Resolution proposal, only those borrower accounts, which were classified as standard, but not in default for more than 30 days with any lending institution as on March 1, 2020, shall be eligible for resolution. It may inter alia include rescheduling of payments, conversion of any interest accrued or to be accrued into another credit facility, or, granting of moratorium, based on assessment of income streams of the borrower for two years.
The RBI did not agree with the contention that accounts which were standard but overdue beyond 30 days as on March 1, 2020 should also be considered eligible for the Resolution as they too may have been impacted on account of Covid-19.
“This is a classic fallacy of composition which presumes that the accounts paying on time can be equated with accounts paying with a considerable delay. 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,” it said.
Some petitioners had sought directions to RBI to announce sector-specific reliefs.
Responding to this, the RBI said “such prayers deliberately obfuscate the fact that Resolution Framework gives complete discretion to lending institutions and borrowers to arrive at resolution plans which are tailored to the specific requirements of the sector subject to the prudential boundaries specified therein”.
It pointed out that the M V Kamath Committee recommended “sector specific thresholds to the mandatory financial parameters, which are more liberal than normal lending financial benchmarks, that need to be considered in the financial projections while designing the resolution plans”.
It said the circular of September 7, 2020 (notifying the recommendations) provides for “separate thresholds for 26 sectors including power, real estate and construction. Even under the power sector, separate thresholds have been prescribed for generation, transmission and distributions sectors. Similarly, separate thresholds have been prescribed for residential and commercial real estate sectors”.
“Sectors such as power and real estate were already stressed even before the pandemic on account of various factors pertain to sector-specific problems,” the central bank said, adding that “the travails of the real sector cannot be solved through banking regulations. The banking regulations of RBI cannot substitute the addressal of structural problems of the real sector”.
“In any case, projects under implementation which are affected due to the fallout of Covid-19 can be restructured under an already existing framework. This extant framework allows for extension of timeline for completion of the projects by 2 years in case of non-infra projects, including real estate projects, and by 4 years for infrastructure projects without downgrading to NPA,” it said.
The government, the RBI affidavit stated, too had taken several measures to address some of the sectoral problems, including creation of a Special Window for Completion of Affordable and Mid-Income Housing (SWAMIH Investment Fund) to provide priority debt financing for the completion of stalled housing projects.
“The recommendations were broadly accepted by the Reserve Bank and accordingly, the Reserve Bank issued the circular dated September 7, 2020 notifying the same,” it stated.