Can't extend loan moratorium as it may affect credit discipline: RBI to SC

RBI said, a long moratorium exceeding six months can impact the credit behaviour of borrowers and increase the risks of delinquencies post resumption of scheduled payments

The Reserve Bank of India, in an affidavit, filed before Supreme Court in the loan moratorium case, said that it would not be possible to give more time as a relief for sectors hit by the coronavirus pandemic.

The Centre made it clear that further relief is not possible beyond waiver of interest-on-interest for certain categories of loan account having borrowing up to  Rs 2 crore.

In the affidavit, RBI told Supreme Court, “Resolution Framework issued by the Reserve Bank on August 6, 2020 is aimed at facilitating revival of real sector activities and mitigating the impact on the ultimate borrowers, which are under financial stress caused by economic fallout on account of Covid-19 pandemic."

"In terms of the Resolution Framework, only those borrower accounts shall be eligible for resolution which were classified as standard, but not in default for more than 30 days with any lending institution as on March 1, 2020.”

RBI further said, "a long moratorium exceeding six months can impact the 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." 

Further, mere continuation of temporary moratorium 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 borrower.

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. 

On the matter of non-performing assets, RBI urged the apex court to lift the stay on classifying any account as NPA. RBI said, "If the stay is not lifted immediately, it shall have huge implications for the banking system, apart from undermining the regulatory mandate of the Reserve Bank of India. It is further urged the SC that the interim order dated September 4, 2020, restraining classification of accounts into NPAs in terms of the directions issued by RBI be vacated with immediate effect."

The Reserve Bank also said that the decision by the government to provide additional relief to a large segment of borrowers has addressed the primary prayers of the petitioners. 

The Finance Ministry had filed an additional affidavit in the apex court on October 2 saying it had decided to waive compound interest (interest on interest) charged on loans of up to Rs 2 crore for a six-month moratorium from individual borrowers as well as medium and small industries.

The Kamath panel had made recommendations for 26 sectors that could be factored by lending institutions while finalising loan resolution plans and had said that banks could adopt a graded approach based on the severity of the coronavirus pandemic on a sector.

Initially, the RBI on March 27 had issued the circular which allowed lending institutions to grant a moratorium on payment of instalments of term loans falling due between March 1, 2020, and May 31,2020, due to the pandemic.

Later, the period of the moratorium was extended till August 31 this year.