RBI Circular On Loan Moratorium
This Blog is written by Archie Anant from Rajiv Gandhi National University of Law, Patiala. Edited by Saumya Tripathi.
INTRODUCTION: ONGOING PLEA IN THE SUPREME COURT
The Supreme Court had given notification to the Center and Reserve Bank of India in a petition filed by The Confederation of Real Estate Developers’ Associations of India (CREDAI) which sought an explanation with respect to whether all NBFCs were qualified for credit ban or whether banks had the circumspection to give the advantage. The RBI, on March 27, in wake of the COVID-19 pandemic and the ensuing national lockdown, issued a Circular, offering freedom to all banks to permit a ban time of a quarter of a year on installment of portions with respect to all term advances which were extraordinary as on March 1, subject to the borrower making such a solicitation.
A request had likewise been recorded under the watchful observation of the Delhi High Court with respect to the appropriateness of the Circular to NBFCs like Indiabulls Commercial Credit Ltd. (ICCL). Justice Rekha Palli had coordinated the state-run Small Industrial Development Bank of India (SIDBI) to explain the equivalent before requesting further advance portion from ICCL. In the petition, under the steady observation of the Supreme Court, Senior Advocate Harish Salve, representing CREDAI, submitted to a Bench of Justices L. Nageswara Rao, Sanjay Kishan Kaul and BR Gavai, that there was a qualification to ban as far as the Circular gave by RBI and a few banks were declining to give the advantage. The emphasis was drawn on the scrape of the NBFCs as they had huge credits, however the banks were declining to give them the alleviation. “The delay of advance, we have individuals from our locale who are in the land organization. We just need the RBI to explain this, to explain whether this is authoritative or not official, regardless of whether they will give or not give”. Advocate General Tushar Mehta informed the Bench that he would in like manner take guidelines from RBI, SEBI and the Finance Ministry. Considering the equivalent, the Bench guided the SG to return with complete lucidity on the issue and gave notice.
SIGNIFICANCE OF THIS DEVELOPMENT
The Reserve Bank of India’s March 27 round allowed loaning organizations to give a 3-month ban on term advances and EMI installments to every single qualified borrower (no rejection to any class/kind of borrower) in the scenery of lockdown due to coronavirus flare-up. RBI, nonetheless, has not made it obligatory to give this alleviation. It has been left to the outlook of the loaning bodies according to their board-endorsed approaches. Also, this ought to be uncovered in open area, expressed the RBI. Notwithstanding, with the Supreme Court’s direction it is hard to accept that loan specialists have any tact. Since in the light of a couple of past legal requests that SMAs be given a comparative treatment to that of any standard record, RBI, expressed that the ban period would not be thought of while grouping non-performing assets (NPA).
The moratorium will help the borrowers, especially corporate entities which have put their production on halt and are facing the problem related to deficit cash flow, to get some extra time so as to optimize their operations and restart their units. The moratorium will be an umbrella to all kinds of borrowings namely term loans, home loans, credit card outstandings and the like. In another huge measure, the RBI has permitted borrowers and banks to change over the interest charges during the moratorium time frame (from March 1 to August 31) into a term loan which can be reimbursed by March 2021. This is relied upon to lessen the pressure on borrowers who have gone for moratorium. Adequately, the benefit order has been expanded to 180 days from the current 90 days, if account isn’t a NPA on March 1. With SC and Delhi HC decisions being partitioned over loan specialists’ optional rights, the undertaking is presently upon the RBI to audit the rules to restore the banks’ caution, which is the plan of the March 27 round, empowering them to accept a choice regarding whether ban should be allowed according to qualification.
As one of the responses to the instant decision, a petition was filed in the Supreme Court on Saturday looking for direction on putting aside the RBI’s March 27 round on three-month ban on credit reimbursement between March 1 and May 31 in the midst of coronavirus pandemic. The Reserve Bank of India (RBI) had given the roundabout offering freedom to all banks and monetary foundation to permit a ban of a quarter of a year on installment of portions in regard of all term advances extraordinary as on March 1, subject to the borrower making such a solicitation. It had said that reimbursement plan for such credits as likewise the lingering tenor would be moved in all cases by a quarter of a year after the ban time frame. Interest will keep on accruing on the outstanding portion of the term loans during the moratorium period. It looked for a bearing to the Center and the RBI to explain that any premium and amassed enthusiasm on extraordinary sum will not be charged from the borrower for the ban time frame by any bank and budgetary establishment. It said that COVID-19 has affected every single portion of society and its outcomes would be unquestionably progressively genuine considerably subsequent to lifting of the continuous lockdown and in such a circumstance, the government and the RBI are “duty-bound to support its citizen”.
As a response to the decision taken by the Reserve Bank of India, many petitions and cases have been filed by the people in order to address their concerns. In the case of Anant Raj Limited v. Yes Bank Limited, the person sought for the provision of loan moratorium by the bank. Further, many petitions have been filed by the borrowers regarding the decision being against the principles of natural justice as the imposition of interest during the moratorium period in the times of lockdown defeats the ideals of economic justice.
The matter of contention here is that the interest will keep on accruing on the loan amount even during the moratorium period. At the end of the three-month forbearance, this interest charged would be added up into the EMIs. One will either have to pay the same in one go or could equally divide it in all the future EMIs. This can have a negative effect upon the financial condition of the borrower in the future as their monthly bill will increase. Moreover, the ongoing lockdown has put a halt to the economic activities undertaken by people in order to meet their daily needs, however, this decision of the RBI is an unjust imposition of interest that defeats the very objective behind the Reserve Bank of India’s permitting moratorium on loans. Justice Sanjay Kishan Kaul orally stated during the virtual court hearing of a petition against the decision of the RBI that, “On one hand granting moratorium and then payment of interest… This is detrimental… These are unprecedented times… These are not normal times”. Justice M.R. Shah along with Justice Ashok Bhushan also expressed their concern over the relief that was alleged to be granted. They propounded what exact benefits were being provided to the borrowers if ultimately the interest was being accrued over the loan. There exists a looming uncertainty which is making individuals worry about the. While there are moratorium seekers who are not exactly facing any kind of cut in salary or financial difficulties but there is an inhibition in them that any such turn of events might arise in the near future. This inhibition made them choose the loan moratorium option, however, they are aware that they cannot escape the financial baggage for long. In fact, it puts an additional baggage on the borrowers in the future.
This option has been left to the borrowers as an ‘opt-in’ option by banks and NBFCs for the relief. Hence, though it is not compulsory it will seem as a lucrative choice to switch to it. But there are many banks which have adopted an ‘opt-out’ mechanism, which will make eligible borrowers automatically have the option of moratorium unless someone specifically opts out of it. However, it might be critical for these borrowers to proactively exercise the right option, especially now that the moratorium has been extended by around a period of three months. Moratorium might not be of advantage but rather a financial baggage for those who are not facing any shortage or deficit in the cash flow. After the end of the moratorium period, the buyers will be provided with three options.
First, they may make a one-time payment of the interest that must have accrued on the loan during the moratorium period. The second option is that the EMI can be increased by the method of adding the accrued interest to the outstanding loan. The third option can be availed by increasing the loan tenure by adding the interest to the outstanding loan. The probability of the banks opting the third option as a default choice is the maximum. Further, the probability of the borrowers choosing the first option of making a one-time payment of the interest accrued on the term loan is the lowest because of the heavy financial burden that would be placed on the borrower at the end of the moratorium period.
 Shreya Sinha, RBI March 27 circular: Lenders’ confusions continue, The Economic Times (09, June 2020), https://bfsi.economictimes.indiatimes.com/news/policy/loan-moratorium-lenders-confusion-galore-as-apex-court-questions-their-discretion/75533041.
 2020 SCC OnLine Del 587.
 Krishnadas Rajagopal, Bank loans moratorium | Supreme Court questions RBI on payment of interest after three months, The Hindu (09 June, 2020), https://www.thehindu.com/business/Economy/sc-questions-rbi-on-payment-of-interest-on-bank-loans-after-three-month-moratorium/article31746908.ece.