Longer break may hit credit discipline: RBI to Supreme Court
The banking regulator’s affidavit also highlighted the “proactive” steps taken by RBI in mitigating the economic impact of Covid-19 and the lockdown imposed to slow its spread.Updated: Oct 11, 2020, 05:15 IST
The Reserve Bank of India (RBI) has told the Supreme Court that the moratorium on loan repayment cannot be extended beyond six months because that could affect “credit discipline”; requested the Court to lift the stay on classifying defaulting accounts as non-performing assets (NPA) because not doing so would affect the central bank’s regulatory powers; and pointed out that banking solutions cannot address the structural problems of the real estate sector.
The banking regulator’s affidavit also highlighted the “proactive” steps taken by RBI in mitigating the economic impact of Covid-19 and the lockdown imposed to slow its spread. It was filed in response to the ongoing case in the Supreme Court that was originally filed by Agra-based Gajendra Sharma seeking a waiver of interest on instalments deferred under the RBI’s six-month moratorium and in which several industrial bodies and associations have joined.
Several experts believe that financial and banking issues are best left to the sector regulator and are not for the courts to weigh in on, especially given their complexity. RBI didn’t take this approach in its affidavit, but pointed out that a waiver could have “significant economic costs which cannot be absorbed by banks without serious dent to their financials” . It further added that the primary plea of petitioners such as Sharma has been addressed by the government’s recent decision to take on the compound cost of all loans, including retail ones, up to ₹2 crore.
In its Friday affidavit, RBI said that a moratorium exceeding six months will impact credit behaviour of borrowers and “increase the risk of delinquencies (defaults) post resumption of scheduled payments”. Continuation of moratorium will also not be in the interest of borrowers as it will exacerbate “repayment pressures”. This will further upset the overall credit discipline and impact credit creation in the economy, RBI said .
The affidavit filed ahead of the Tuesday hearing on the case also urged the court to lift the stay on declaring accounts as NPAs as this decision undermines the regulatory mandate of the RBI. “An across the board stay on classification of any account as NPA…if not lifted immediately, shall have huge implications for the banking system,” RBI said. The top court on September 3 said: “The accounts which were not declared NPA till August 31, 2020 shall not be declared NPA till further orders.”
The central bank was also very clear that while it was willing to cut some slack for borrowers whose repayment abilities have been affected by the pandemic, it will do no such thing for others , and refused to offer relief to borrowers who have demanded extension of resolution plan for loans that were overdue beyond 30 days as on March 1, 2020. “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. On October 2, the Finance Ministry informed the SC of its decision to waive off the compound interest accruing during the moratorium. This “interest on interest” waiver was applicable to loans of up to Rs 2 crore taken by individuals or micro, small and medium enterprises (MSMEs). When the matter was last heard on Monday, a three judge bench headed by Justice Ashok Bhushan said it could not find any notification by which this relief had been implemented. The bench, also comprising Justices RS Reddy and MR Shah asked the Union government and RBI to highlight this on affidavit and also desired to know what relief was in place to address sector-specific issues, for businesses such as real estate and power.
RBI filed the KV Kamath Committee recommendations which lay down financial parameters for restructuring 26 industries. It stated that sectors such as power and real estate were already stressed even before the outbreak of the pandemic. “The travails of real sector cannot be solved through banking regulations,” RBI added, pointing to the burden of unsold inventories and stalled projects that is crushing the real estate industry.
The central bank’s affidavit explained that by a September 7 notification, it had laid down the thresholds for the 26 sectors based on Kamath Committee recommendations. This specifically addressed the issues concerning power and real estate. The affidavit stated that even in respect of borrowers who were in financial difficulty when the pandemic broke out, there will be no bar on restructuring such accounts as the lending institutions will be free to make their own assessment. Divakar Vijayasarathy, founder and managing partner at consulting firm DVS Advisors LLP, said the concern of RBI is genuine and well founded. “Further Extension of moratorium would have been catastrophic for the quality of banking portfolio and to the credit culture of the borrowers. Wish courts let regulators take decisions based on sound economic practices. We should also not forget that banks raise funds from small depositors and retail shareholders and any further extension would have put their stakes at risk,” Vijayasarathy added. Chartered accountant Vijay Kumar Gupta, former Central Council Member of the Institute of Chartered Accountants of India (ICAI), said, “The banking regulator should be allowed to take prudent decisions so that the sector should not fall sick, which will have larger and adverse implications for the economy. Borrowers must, however, be protected through fiscal stimulus and budgetary measures.” Along with the RBI, the Centre too filed an affidavit in the Supreme Court in the loan moratorium case. The ministry of finance, in its affidavit filed on Friday, told the Court that the decision to waive off “interest on interest” will have to undergo appraisal by the Expenditure Finance Committee and thereafter would be placed for approval of the Union Cabinet. Only then the decision will mature into an Office Memorandum or circular or order. The reply came pursuant to a query put by the Court on Monday asking the Centre when the notification announcing waiver on compound interest on repayment of loans during moratorium will be issued. Its only after the notification will be issued, the lending institutions will be in a position to implement the Scheme. Further, the Centre urged the Court not to entertain further judicial review on the petitions pending before it as “fiscal policy is the remit of Government”.