AN ANALYSIS OF RBI’S MORATORIUM CIRCULAR

This article is written by Anusha Mohapatra from Symbiosis Law School, Hyderabad

Overview

The real estate sector has been one of the key contributors to India’s GDP. The COVID-19 pandemic, has had a wide variety of implications on all sectors. Whilst already suffering from the impact of labor and consumer preference fluctuations, alongside a hampered demand and supply setup and changes in regulations which came in the form of Real Estate Regulatory Authority, Alternate Investment Funds, Extension of date for Commencement of Commercial Operations etc.

The RBI paying attention to the effects of the pandemic on firms who had maintained their financial performance overtime decided to come up with a solution for the same, so as to aid and address the liquidity issues faced by the sector in the form of a Resolution Framework.

Notification/Circular

In a public interview dated May 22, 2020, the Reserve Bank of India (RBI) pronounced an extension of the ban on term loan EMIs by an additional three months, until August 31, 2020. The past three-month ban on the loan EMI’s lapsed on 31 May 2020. This makes it a total duration of half year of ‘month to month credit likened portions’ (EMIs) ban from 1 March 2020 to 31 August, 2020. Expanding the three-month EMI ban on reimbursement of term loans implies that moneylenders don't need to pay EMI instalments for their credit during the time endorsed by the RBI. This move by the RBI, has raised certain areas of concern and consideration that must be tackled by both the RBI and policy makers.

Expected Outcome

The extension would give alleviation to many, especially the individuals who are independently employed, as they would have thought that it was hard to support their credits, for example, car loans, home loans, and so forth., because of misfortune or pay deficiencies during the national lockdown time frame from 25 March 2020. Missing an EMI instalment would mean requesting that banks make unfavourable moves that could antagonistically sway one's credit score.

Effects of COVID-19

This move was deemed necessary, as all economic activities had come to an unfortunate halt, due to the ongoing pandemic which also affected the banking environment. Maintaining liquidity and a drop in demand and supply followed by difficulties for small entrepreneurs led up to the Reserve Bank of India releasing the said press statement.

Cases

With the Supreme Court and the Delhi High Court’s decisions being at loggerheads over banks' optional rights, the onus is currently upon the RBI to survey the rules in order to re-establish the lenders discretion which is the aim of the March 27 circular, empowering them to accept a choice concerning whether moratorium should be allowed according to eligibility.

In a pending case at the Delhi High Court, namely Indiabulls Housing Finance Limited vs. HDFC Bank Limited, The counsel representing RBI said: “It has already been explained that the RBI Circular is discretionary in nature and enables the lender to determine whether or not a moratorium should be given to a specific borrower, even though that decision was taken in an objective manner.”

In another writ petition, filed before the Karnataka High Court in the case of Velankani Information Systems Limited vs RBI and other leading banks (HDFC, Federal Bank, Aditya Birla Finance Banks Limited), the High court after taking into account various contentions of the abovementioned banks, went onto conclude, that the Circular dated 27th March 2020, was in fact one to preserve the economy of our country which would be in shambles due to the COVID-19 pandemic. Whilst a private body could be compelled to enforce its statutory obligations, this circular was in the interest of the public and the economy. Thus, this enforcement would be one under the purview of public duty. The court also went onto say, that the private banks must fulfil their obligations to all the customers they previously considered eligible for grant of such moratorium, as per the RBI guidelines. This grant of moratorium shall also, not signify a waiver of interest and/or principal amount.

Interpretation

The Reserve Bank of India has allowed banks to rebuild advances of borrowers affected by Covid-19, without labelling these records as non-performing. The arrangement this opportunity has arrived with is one with more oversight and expanded exposures.

Rajiv Anand, wholesale banking executive director at Axis Bank, said that the most likely candidates for restructuring are borrowers who took the moratorium in the first round and proceeded to take advantage of the relief in the second round. These borrowers, are relatively common across different sectors. He also mentioned heightened inspections, disclosures and already increased provisioning as means could be used to prevent a return to when lenders used such forms of restructuring to hide stressed loans.

As per the press release by the Reserve Bank of India as a Statement on Developmental and Regulatory Policies due to the financial conditions caused by COVID-19, the Supreme Court of India had directed the Centre under the The Disaster Management Act, No. 53 of 2005 to waive the interest that was being charged on EMI’s during this moratorium period. Justice Ashok Bhushan, while heading the bench, made a statement to go onto allege that the Centre by bringing about a lockdown had caused such a problem to arise in the first place. Following which, the Centre was said to be focusing primarily on the economic aspect of the crisis and not in terms of relief.

Conclusion

The conclusions derived, have been based on the interpretation of courts as per the Circular issued by the RBI dated 27th March 2020. It is to be understood that whilst the circular is discretionary w.r.t the ascertainment of whether or not to grant such moratorium, the onus is mandatorily imposed on the Bank so as to ensure that not granting such moratorium does not lead to profound implications on the continuity of viable businesses.

Thus, the borrowers are entitled to seek a grant of such moratorium if it affects the survival of their businesses. Certain exceptions could be made for those bona fide borrowers with minor defaults and those whose credit facilities have been affected by the lockdown imposed. Thus, flexibility exercised on behalf of the banks to decide the applicability of the said circular, by analyzing factors affecting demand, productions and supply alongside considering revival of bona fide borrowers could be a viable solution. In such grim circumstances, it will inevitably be difficult for such enterprises to fulfill their contractual stipulations, hence making it more and more difficult for them to continue being solvent. Triggering of the Insolvency Code and SARFAESI for debt recovery may render numerous industries as helpless in terms of revival. Not mentioning the additional burden on the judiciary. Thus, prolonging the enforceability of such a circular to a larger time frame, coupled with a flexible approach on behalf of the banks whilst determining the defaulter borrowers may help to a great extent.