Relief on loans up to ₹2 crore addresses borrowers’ distress, RBI tells Supreme Court

Complete waiver of compound interest will destabilise broader financial stability, says central bank

The Reserve Bank of India (RBI) has told the Supreme Court that the Centre’s resolve to shoulder the cost of ‘interest on interest’ for MSME loans and personal loans up to ₹2 crore addresses pandemic-induced financial distress among borrowers.

The RBI termed it additional relief.

Also read: RBI loan restructuring plan | A difficult choice for borrowers

The central bank reasoned that a complete waiver, on the other hand, of compound interest (interest on interest) chargeable during the six-month moratorium would destabilise “broader financial stability” and irreparably dent the banks.

“A long moratorium exceeding six months can also impact credit behaviour of borrowers and increase the risks of delinquencies post resumption of scheduled payments. It 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 who may end up bearing the brunt of the impact, as their access to formal lending channels is critically dependent on the credit culture,” the RBI told the Supreme Court in an affidavit filed late on October 9.

The affidavit contains a consolidated reply to demands for financial reprieve and waiver of compound interest made in a host of petitions filed across sectors from power to real estate and individual borrowers whose purses have been affected by the virus onslaught.

‘Temporary relief’

The RBI said the moratorium was only a temporary relief implemented without discrimination. The decision on how to implement and which customer should get the benefit of moratorium was left to individual financial institutions and banks.

“The lending institutions have been permitted to extend the moratorium to any borrower/class of borrower in a transparent manner based on their board-approved policies. Similarly, even the borrowers have the discretion on whether to avail of the moratorium or not, after weighing various costs involved,” the affidavit explained.

The RBI explained that its Resolution Framework, based on the suggestions of the K.V. Kamath Expert Committee, issued on August 6, was aimed at facilitating revival of real sector activities and mitigating the impact on the ultimate borrowers. The framework gives complete discretion to lending institutions and borrowers to arrive at resolution plans tailored to the specific requirements of various sector, of course, subject to the “prudential boundaries”.

The resolution plans to take into account the pre-Covid-19 operating and financial performance of the borrower and impact of the virus on the latter.

The affidavit presents a bleak picture on power and real estate sectors, which were “already stressed even before the outbreak of the pandemic”. The “travails” of the real estate sector cannot be solved through banking regulations alone, the RBI noted.

“The banking regulations of RBI cannot substitute the addressal of structural problems of the real [estate] sector… Real estate sector has undergone structural changes in the recent past and is also facing a demand problem as evident from the high levels of unsold inventories and stalled projects,” the central bank pointed out.

However, the RBI said an “already existing framework” could be used to restructure projects under implementation and affected by the pandemic. “This extant framework allows for extension of timeline for completion of the projects by two years in case of non-infra projects, including real estate projects, and by four years for infrastructure projects without downgrading to non-performing assets”.

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