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Loan Moratorium can be extended for up to two years: Centre informs the Supreme Court

The Centre has told the Supreme Court that the Reserve Bank of India (RBI) circulars on loan moratorium and various other initiatives adopted during the COVID-19 pandemic effectively resolve issues related to loan repayment and interest on loans.

"A waiver of the interest on interest during moratorium would also be against the basic canons of finance", the affidavit filed by the Centre states.

The Centre has articulated in its affidavit, filed before the Supreme Court, on the different measures that the RBI has taken and considered for various forms of borrowers and lenders.

This RBI system, along with the several relief initiatives announced by the Centre for various sectors in distress, resolves the complaints brought before the Court by petitioners who challenged loan interest charges during the moratorium period.

On the specific question that was posed by the Court to the Centre on waiver of interest on interest, the Centre has made its position clear. The affidavit filed by the Centre says,

"A waiver of the interest on interest during moratorium would also be against the basic canons of finance."

The Centre's reply comes after the Supreme Court had earlier pulled it up for "hiding behind the RBI" and failing to make its own stand clear. Solicitor General Tushar Mehta had, at that time, told the Court that the government's stand would not be adversarial to that of the RBI's.

Based on the same, the affidavit now filed claims the finance ministry was monitoring relief initiatives for the financial sector. The authorities did not interfere under the National Disaster Management Act (NDMA), provided that they would not have had the skills to deal with the difficult topic of policy decisions that affect the "financial stability of the nation in general and the banking sector in particular."

The government had taken various measures, taking into account the changes in financial stability of the nation, the probable unforeseen financial burden on the exchequer, the uncertain nature of the pandemic, the implications of the various reliefs granted, and the limitation of resources. The affidavit elaborates on those measures to mitigate the financial suffering that could be caused to different sectors.

The Ministry of Finance had remained in touch with the RBI to come up with appropriate relief measures in view of the fact that a "one size fits all" solution could not have been given to the various categories of stakeholders involved.

This, the affidavit says, is due to the various type of borrowers, the difference in the nature of lenders, the different reconfiguration of loans for different types of loans, and an obligation to ensure financial health and practicability for all lending institutions.

RBI's circulars authorising the moratorium were a transitional measure, enabling creditors to have a window where loans would not become Non-Performing assets. Collection of payments and penalties will be deferred whether the creditor has decided to take advantage of the suspension, clarifies the Centre.

This arrangement, while giving certain benefits to borrowers, also placed some burden on banks and lenders that continued to incur costs on their deposits, the affidavit explains.

"...while the standstill applicable to bank loans results in the bank not getting its funds back during the period of the moratorium, the bank continues to incur cost on bank’s deposits and borrowings. It is respectfully submitted that since a moratorium offers certain advantages to borrowers, there are costs associated with obtaining the benefit of a moratorium."

Further, the affidavit states that the RBI circular dated August 6 addresses various issues and provides the desired reliefs to the borrowers. The Centre has also, over time, announced various relief measures for various sectors hit adversely by the pandemic, the affidavit states.

Opposing the waiver of interest on interest as well as changing the terms and conditions belatedly would not be fair and equitable, the Centre further adds.

"...ex post facto change in the terms and conditions of the offer of moratorium favouring those who availed of it over those who made the extra effort of repaying as per schedule would be grossly inequitable and patently unfair for those who did not avail of the benefits of moratorium initially or gave it up subsequently." Centre's affidavit before Supreme Court

In outlining the resolution process of the RBI to minimise the effect of COVID-19, the Center says that at some stage any moratorium offered must end. This needs a more viable long-term approach to preserve the nation's economic and financial stability.

As such, the circular released by the RBI on August 6, which provides for loan rehabilitation, takes into account all groups of borrowers and lenders while leaving it open to the lending institutions to determine the kind and kind of relief to be provided to their borrowers.

The RBI's August 6 circular allows the banks to provide resolution plans for their borrowers with respect to eligible loans. The affidavit explains further:

"...the resolution plan may involve any action/plan/reorganisation including regularisation of the account by, inter alia, restructuring, which is described as an act in which a lender grants concession to the borrower and which may involve modification in terms of advances/securities, which would generally include, among others, alteration in payment amount/amount of instalment / rate of interest."

Borrowers who fear that their accounts will become NPAs may request to avail extension on moratorium, which the banks are empowered to grant for a period up to two years in line with the RBI's August 6 circular, the Court is told in this affidavit.

Thus, summarising the benefits and "customised relief" that banks and lending institutions are empowered to provide, it is said:

"...with the framework under the RBI circulars dated 6.8.2020 now in place, banks are fully empowered to resolve COVID19-related stress and customise relief to individual borrowers through grant of various concessions in terms of:-

(i) alteration in the rate of interest and haircut on amount payable as interest

(ii) extension of the residual tenor of the loan, with or without moratorium, by up to two years;

(iii) waiving penal interest and charges;

(iv) rescheduling repayment;

(v) converting accumulated interest into a fresh loan with a deferred payment schedule; and

(vi) sanction of additional loan.

In view of these steps taken by the RBI and the Centre 's numerous relief initiatives, especially the Ministry of Finance, the Centre argues that the reliefs sought by the petitioners before the Court were issued and that the complaints were adequately addressed.

Furtheron this case’s r hearing on Wednesday, September 2, Solicitor General Tushar Mehta and Senior Counsel V Giri for RBI made their submissions.

Tushar Mehta stated that the impact of COVID-19 is faced by everyone but the impact is different for every sector. Impact is good also on some sectors like Pharma sector, IT sector (referring to companies like Netflix).

Further adding he said that The idea of Moratorium was to defer repayment to ease the burden caused by COVID-19 and lockdown so that business can manage working capital. The idea was not to waive off interest.

Justice Bhushansays:

The main grievance of the petitioners is that they have not been given the adequate relief and the National Disaster Management Authority (NDMA) under the Disaster Management Act (DM Act) has not been active to give relief.
Whether something more has to be done by NDMA and other authorities under DM Act? You have rightly said that other circulars are not under challenge so we are bound by Article 32 jurisdiction.

Their argument is that there has to be sector-wise relief.”

Supreme Court takes Mehta's and Banks' submissions on record, says "accounts not declared NPAs till August 31 not to be declared NPAs till further orders."Concluding the hearing.

Bench to resume hearing in the case on Thursday, September 10 at 10.30 AM.





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