Image for representational purpose only.
Image for representational purpose only.

RBI moratorium, its legality and its impact on the Indian Economy

There may be a possibility that a full or qualified moratorium may extend beyond 31st August 2020 which is yet to be announced.

Introduction:

The unprecedented economic situation faced by the country necessitated swift measures to be adopted by the Reserve Bank of India to protect businesses and the ability of a debtor to service debt at a time when the country was under a lockdown resulting in negligible economic activity. The Reserve Bank of India issued a Statement of Development and Regulatory Policies on March 27, 2020 to address the financial stress on account of the COVID-19 pandemic.

On that day, the Reserve Bank of India with an intention to ensure continuity of viable businesses and to reduce the burden of debt servicing introduced a Moratorium on Term Loans where all commercial banks, co-operative banks, all India Financial Institutions and Non-Banking Finance Companies were permitted to allow a moratorium of three months on payment of installments in respect of loans outstanding as on March 1, 2020.

The interest on the outstanding portion of Term Loans would continue to accrue and in terms of the Working Capital Facilities, the accumulated interest shall be recovered immediately after the moratorium. The non-payment of installments during the moratorium would not result in "asset classification downgrade" and would not qualify as a "default". On May 23, 2020, the moratorium was extended by the Reserve Bank of India from June 1, 2020 to August 31, 2020.

There may be a possibility that a full or qualified moratorium may extend beyond August 31, 2020 which is yet to be announced. This being the measures adopted by the Reserve Bank of India, significant litigations on these circulars issued has been initiated, pending and disposed of before various Courts in the country.

The Velankini Information Case: Circular Discretionary, Mandatory for Bank;

A writ petition came to be filed before the Karnataka High Court for grant of moratorium which was disposed of on July 8, 2020. This remains the sole significant judgment on circulars of moratorium issued by the Reserve Bank of India and its applicability.

The primary issues dealt with by the Karnataka High Court was firstly whether the circular issued by the Reserve Bank of India was mandatory or discretionary? Secondly, whether the grant of moratorium is at the discretion of the Bank or would it be a right exercised by the Borrower? Answering these two issues, the Karnataka High Court held that once banks have expressed their solidarity stating that all customers are eligible for a moratorium, it is not possible for banks to renege and not grant a moratorium.

The Court further held that "the Circular dated March 27, 2020 issued by the Reserve Bank of India though is discretionary, it is mandatory for the Bank to ensure the continuity of viable businesses, in that, the non-grant of a moratorium should not result in adversely affecting the survival and continuity of a viable business. All borrowers are eligible to seek for a moratorium, if a borrower were to seek for grant of a moratorium on the ground that continuity of its business would be affected and establish the same, the borrower would as a matter of right be entitled for the grant of moratorium so that such continuity is not adversely affected."

To summarise, the Court held that the Circular is discretionary but mandatory on Banks to provide the same in event the borrower is able to establish that the subsistence and continuation of the business would be affected.

The Zee Learn Limited Case: Inapplicability of the Moratorium

There existed a default on payment for debentures issued allegedly due to the COVID-19 pandemic and the Bombay High Court considered the issue as to "whether the moratorium would cover such default and apply to mutual funds or debentures".

The Bombay High Court categorically held that "it is clearly beyond reasonable doubt that those two circulars would not apply in case of mutual funds and debentures." Another interesting finding in the said judgment was that "the circulars clearly indicate that those circulars only permits those entities to provide moratorium of three months and does not record any directives to grant such moratorium".

In essence, this finding leads to an inference that the circulars issued is only permission given to the Commercial Banks, all Primary (Urban) Co-operative Banks, States Co-operative Banks, District Central Cooperative Banks, All India Financial Institutions, All Non-Banking Financial Companies to issue a moratorium but not a directive against these institutions.

The Gajendra Sharma Case: Constitutional Validity of the Circulars

Apart from these two judgments in the Velankini Information Case and the Zee Learn Limited Case, the constitutional validity of the circulars issued by the Reserve Bank of India has been challenged and pending before the Supreme Court of India. Another question as to whether the said moratorium will apply to Non-Banking Finance Companies has also been clubbed and is now heard commonly.

The arguments put forth before the Supreme Court during the hearing dated June 17, 2020, it was argued that firstly the moratorium substantially does not give relief to borrowers and secondly, that if moratorium is granted, the entire amount of principal and interest should not be charged. Thirdly, as an alternative, if not principal, at least the demand of interest should not be made.

The Government responded to these contentions stating that meetings are being held with the Finance Ministry and Reserve Bank of India on whether any reliefs can be given. The Indian Banking Association represented that different sector schemes can be considered for individual specific industries. The matter is now listed for further hearing during the first week of August.

Alternative Measures undertaken by the Reserve Bank of India:

The Reserve Bank of Indian in order the improve the liquidity position of Non-Banking Finance Companies (“NBFC’s”) and Housing Finance Companies (“HFC’s) has introduced a special liquidity scheme by establishing a special purpose vehicle which would purchase commercial papers from eligible NBFC’s and HFC’S who would have to utilize such amounts to settle existing liabilities.

The scheme would not be available post-September 30, 2020 and recovery would be by  December 31, 2020, which may be modified. This measure would be a much need window of liquidity which would immensely benefit such sectors of banking.

Conclusion:

The existence, survival and revival of every business sector hinges on the outcome of the litigation pending before the Supreme Court. The verdict would set the potential tone for every business sector in the coming future.

The outcome of the verdict would be so crucial that it would even affect the common man. Any grant or relief by the Government of India, Finance Ministry and the Reserve Bank of India would reshape and revive the battered Indian economy, which more than any discretionary measure would be the much-needed call for the nation. To maintain the principle of equality, it is most important that any concession if granted should also be extended to individuals, corporations and others, who have not opted for the moratorium fearing the interest accruals.

In the event the circulars are held to be constitutional and the conditions of the current moratorium are held valid, non-arbitrary and lawful, it would most certainly put all sectors of business in doldrums as there would be negligible revenue streams and sectors would struggle to pay the accrued and accumulated interest amounts. Urgent and swift decision making from the Government would be the need of the hour along with sector centric schemes addressing the concerns of each specific business.

The article is authored by Pawan Jhabakh & Salai Varun, Advocates at the Madras High Court. The views expressed in this article are personal.

Related Stories

No stories found.
The New Indian Express
www.newindianexpress.com