An Interest(ing) Issue of Loan Moratorium

This blog is inscribed by Deeksha Rastogi.

The pandemic (COVID19) has caught the world in a vicious cycle. Besides the lives of individuals, their means to live is also at risk. Economic contagion is strewing as fast as the virus. On a macroeconomic level, a country like India longing for financial stability and self-reliance (atmanirbhar Bharat), has received a hard blow. Introspection of the prevalent situation reveals that India is not only medically but is now financially unstable. The economy which was stifling for fresh air has currently been put on a life support system. Considering social distancing to be the ideal way to avert the mushrooming of imperceptible coronavirus, the Government of India on March 24, 2020, has called for an unprecedented 21 days nation-wide lockdown followed by several other rounds of lockdown. Though the lockdown has ended, barring few containment zones, the struggle of the common populace seems endless.

It is commendable that the government is taking efficacious steps to revitalize the economy. Many relief packages in various sectors were introduced to keep the blood flowing in its veins. To this effect, the Governor of the Reserve Bank of India (RBI) had issued a notification Statement on Developmental and Regulatory Policies” dated March 27, 2020 with an aim to inter-alia ease the financial stress caused by COVID-19 disruptions. It endeavours to relax repayment pressures and improve access to working capital; further to improve the functioning of markets in view of the high volatility experienced with the onset spread of the pandemic. To this effect, all lending institutions governed by the RBI namely all commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies) were permitted to grant three months moratorium on payment of instalments of all term loans including agricultural term loans, retail and crop loans and working capital repayments falling due between March 1, 2020, to May 31, 2020. The instalment could be of principal and/or interest components, bullet repayments, equated monthly instalments or credit card dues. Gauging the incalculable situation, the regulatory authority on May 22, 2020 has further extended the moratorium by three months from June 1, 2020, to August 31, 2020. Undoubtedly, the regulation aims to provide a breather to the borrowers, but it has certainly opened a floodgate of clarifications, interpretations and needless to say, litigation. 

Even though the regulation was introduced later in March, it is made applicable retrospectively, thereby, providing relief for those instalments which fall due on and after March 1, 2020. It aids those borrowers who were properly servicing their account till March 1, 2020 but the recent outbreak has burnt a hole in their pockets facing hardship in writing off their debts.

However, there is a persistent ambiguity with respect to the commitment of regulatory packages by the banks. For instance, the public banks such as State Bank of  India, Bank of Baroda are opting for blanket moratorium for all its term loan and working capital borrowers while on the other, the private banks such as IndusInd, HDFC are sitting back for their customer to request for the relief individually[i]. Even though it is not much of an issue whether the bank goes to the borrowers or the borrower himself requests for the moratorium, enigma is to the fact whether the bank exercises any sort of discretion in granting moratorium; in other words, the question is whether the regulatory package is binding and mandatory on all the banks or not. Due to the difficulty faced, the Real Estate Association has sought the intervention of the Supreme Court against the unequal treatment by banks and financial institutions including the Non-Banking Financial Company (NBFCs) and Housing Finance Company (HFCs) and on account of lack of clarity with respect to the applicability of the regulation.

Furthermore, addressing different facet with respect to the applicability of the policy, the Delhi High Court observed in Annant Raj v. Yes Bank that “the intention of RBI is to maintain status quo with regard to the classification of accounts of the borrowers as they existed as on March 1, 2020“. It suggests that the asset classification from March 1, 2020 to May 31, 2020 for all such accounts will be suspended. Implicitly, the policy strives to buy some time for those borrowers also who had defaulted their repayment prior to March 1, 2020, without offering any concession on the penalty. Later, the RBI’s clarification that the 90-day Non-Performing Asset norm will eclipse by virtue of the moratorium period, has put a rest to the dubiety. Any default during this time shall not disturb the CIBIL/credit score of the borrower.

Ironically, evil is in the detail, which has called for a larger debate with respect to the loan moratorium. Contrary to what it appears, one has to analyze their financial health before opting for it. It merely intends to postpone the recovery of monies. It is widely known as a “repayment holiday” since the regulatory authority has planned only for deference and not the waiver of instalment dues. The interest will continue to be levied during the moratorium. Notwithstanding, the virus has brought the lives of individuals to a standstill; imposition of interest is only recurring and constant. The interest accumulated can be paid off either all at once on expiry of the moratorium or can be adjusted into the monthly dues thereby increasing the instalments. 

This cryptic aspect of the regulation has finally caught the public eye and so is the legal fraternity. The abovementioned policy is arraigned before the Apex court in Gajendra Sharma v. UOI and CREDAI v. UOI for taking the capricious and arbitrary decision of levying interest on interestIt was contended that “the State cannot enrich itself or permit any other organization or institution to be enriched particularly when it is dealing with an Emergency, which has affected each and every segment of the society and it would not be fair to permit Banks/Financial Institutions to charge interest on the outstanding amount for the Moratorium Period, when citizens cannot work to comply the Government’s instructions and are compulsorily incapacitated to generate funds“.[ii] Despite the curtailment of the means of livelihood amid lockdown rendering majority of population helpless with no stable source of income, unnecessarily encumbering the borrower calls for invocation of Article 14, 19(1)(g) and 21 of the Indian Constitution.  Per contra, the RBI and the Indian Banking Association (IBA) are contesting vehemently based on the calculation that the waiver of interest would mean sacrificing about Rs 2,01,000 crore which is close to 1 per cent of the national Gross Domestic Product, leaving aside the NBFCs and all other financial institutions. Banks earn through interest. As the Indian economy is still recuperating itself from Yes Bank crisis, letting this forego will be detrimental for the banking sector. The Solicitor General Mr Tushar Mehta, appearing for the Centre and Banks, apprised the court that banks have 133 lakh crore deposits and interest has to be paid on them to which waiver will have a cascading effect. The banks are not getting any leeway in rewarding interest on fixed deposits rates during this time than letting the waiver of interest will be prejudicial for the banking institutions. The Supreme Court resonated with the borrower’s argument and expressed their concern over its implications on the borrowers. The Bench conveyed that the borrowers are not contesting for the waiver of the loan but the unfair and unjust levy of interest on interest during the moratorium, thereby, undermining the rationale behind the policy. Accordingly, the RBI has now sought time to ponder upon the policy once again.

The whole discussion contemplates the difference of opinion, on one profit are hovering over their minds and on others to keep their body and soul together. Renouncing such a big amount, undoubtedly, is strenuous for the RBI and the IBA and has certainly put our financial state of affairs at low ebb. The regulatory authorities, reportedly, are jointly thinking of coming up with the solution by analyzing each case of the borrower discreetly. However, it is an equally plausible argument that apart from medical and infrastructure fall out, the country will not be able to bear the financial institutions going down the drain. But if banks were given leeway to decide which customers should be given dispensation from the interest, that will certainly result in differentiation between the customers. The shortsightedness of the authorities has created a state of indecision. At once the government vandalizes the means to earn by keeping everyone at house arrest and ensures further that he pays off his employees in full, maintain his workforce and indemnify all his conventional liabilities. Instead of providing actual aid to the public, afflicts them with additional debt. The whole package is just an eyewash as it is said to comfort the strained economic condition of the country but in reality, it is meant to coin money.



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