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Moratorium Beyond 6 Months Increases Delinquency Risks and Puts Burden on Borrowers: RBI Tells SC
Moneylife Digital Team 10 October 2020
Economy & Nation
A long moratorium exceeding six months can impact credit behaviour of borrowers and increase the risks of delinquencies post resumption of scheduled payments, the Reserve Bank of India (RBI) told the Supreme Court.
 
According to a report from LiveLaw, the central bank has submitted an affidavit in the Supreme Court, saying, "It (the moratorium exceeding six months) may result in vitiating the overall credit discipline, which will have a debilitating impact on the process of credit creation in the economy. It will be the small borrowers, which may end up bearing the brunt of the impact as their access to formal lending channels is critically dependent on the credit culture."
 
 
Further, the RBI says, "Mere continuation of temporary moratorium would not even be in the interest of the borrowers. It may not be sufficient in addressing deeper cash flow problems of the borrowers and in fact, exacerbate the repayment pressures for the borrowers. Therefore, a more durable solution was needed to rebalance the debt burden of viable borrowers, both business as well as individuals, relative to their cash flow generation abilities."
 
The RBI also informed the apex court about its resolution framework for Covid19-releted stress announced on 6 August 2020. The resolution framework enables lenders to implement a resolution plan in respect of personal loans as well as other exposures affected due to COVID19, subject to the prescribed conditions, without asset classification downgrade. It permits extension of the moratorium by a maximum of two years, the central bank says.
 
Last week, the union government informed the Supreme Court that it has taken a decision to waive "interest on interest" on loans up to Rs2 crore during the six-month moratorium period.
 
"After careful consideration and weighing all possible options, the respondent Union of India has decided to continue the tradition of handholding the small borrowers", said the Centre.
 
The categories of loans up to Rs two crore include: the medium, small and miro enterprises (MSME) loans, education loans, housing loans, consumer durable loans, credit card dues, auto loans, personal loans to professional and consumption loans.
 
The Centre said it is impossible for the banks to bear the burden resulting from the waiver of compound interest without passing on the financial impact to the depositors or affecting their net worth adversely, which would not be in the larger public interest.
 
The affidavit said: "The government, therefore, has decided that the relief on waiver of compound interest during the six-month moratorium period shall be limited to the most vulnerable category of borrowers."
 
After the recommendations of an expert committee, the Centre has altered its stand. Previously, the RBI and the Centre had argued against waiver of interest on interest, as it would be against the interests of other stakeholders, especially depositors, and also unfair to those who have paid their dues.
 
A bench comprising Justices Ashok Bhushan, RS Reddy and MR Shah had urged the Centre to have a re-look at its decision in the backdrop of financial hardship faced by many amid the ongoing Covid-19 pandemic, even though the top court had agreed to not waive interest altogether.
 
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