“Considering the fact that the time limit for continuance of the present economic issues is uncertain, as a policy it is undesirable to either give any ‘one-size fit all’ solutions; nor would it be desirable to provide for a static relief formula.”
“Such reliefs are given depending upon the availability of resources and without compromising the financial stability of the banking sector, and are always subject to changes keeping in mind the evolving dynamic situation at various stages,” the Finance Ministry said.
Any “ex post facto” change in terms and conditions of the moratorium favouring those who availed of it over those who made the extra effort of repaying would be grossly inequitable and patently unfair for those who did not avail of the benefits of moratorium initially or gave it up subsequently.
“A waiver of the interest on interest during moratorium would also be against the basic canons of finance,” it said.
The Ministry instead suggested that consumers and businesses could apply for waiver of interest and rescheduling of payments as per the fresh RBI circulars offering several bank concessions to help the covid-affected tide over the impact on their incomes and businesses.
“… any moratorium is transient by its very nature and has to end one day. Thus the best interest of the economic health of the country as well as that of the respective borrowers would be best served by paving the way for a more durable long-term solution of debt restructuring,” an affidavit said.
“… since a moratorium offers certain advantages to borrowers, there are costs associated with obtaining the benefit of a moratorium. Borrowers take a conscious call while opting for a moratorium and many borrowers after understanding the advantage of paying in time did not avail of the moratorium when the initially announced period of moratorium was extended from three months to six months.”
Revival of stressed borrowers should involve restructuring of their loans within the RBI framework rather than hinge on extending the moratorium, the Ministry said.
The RBI has come out with many circulars to revive real sector activities and mitigate the impact on the ultimate borrowers by enabling lenders to grant concessions to borrowers for COVID-19-related stress in personal, MSME and corporate loans, it said.
This would enable lenders to implement individual resolution plans in respect of the loans having stress on account of the COVID-19 pandemic. It would help banks not treat them as NPAs.
Banks could under the rules customise relief to individual borrowers through grant of various concessions in terms of alteration in the rate of interest and haircut on amount payable as interest, extension of the residual tenor of the loan, with or without moratorium, by up to two years, waiving penal interest and charges, rescheduling repayment, converting accumulated interest into a fresh loan with a deferred payment schedule and sanction of additional loan.
The affidavit was filed by Solicitor General Tushar Mehta. Individual borrowers could approach their banks for relief through the loan resolution process, the affidavit said. Mehta told a three-judge bench led by Justice Ashok Bhushan that it would also take a decision on waiver of interest on the interest component imposed for the loan moratorium period.
The RBI had earlier opposed any across the board waiver of interest on loans on the ground that it would hit the bottom lines of banks. The government had backed the RBI saying that the moratorium was more of a deferral of interest than waiver of interest and refused to take an independent stand.
Following a chiding from the court which flayed the government for only thinking only on commercial lines and ignoring the plight of the people, the Finance Ministry filed an affidavit on the issue clarifying that it was opposed to any en masse interest waiver. The court will examine all these issues in detail tomorrow.
The government said that it was fully conscious of the impact of the pandemic on all sectors and had taken several steps to mitigate them. The Finance Ministry said that the duration of the pandemic was uncertain and said that it had tried to work out relief measures keeping in the financial stability of the economy.
It had also taken into consideration the additional unforeseen and unexpected financial burden imposed on the exchequer given the limited resources at its disposal to provide relief packages to citizens at large, adversely affected due to the pandemic and the difference in implications of relief granted across sectors.
The government has also taken several other steps to reduce the financial impact of the small borrower and businessman. The Ministry of Finance was fully alive to the problems of the borrowers which obviously cannot be a homogenous class, but by its very nature, has various categories of borrowing, namely, corporate loans, MSME loans and personal loans etc, it said.
Each of these three broad categories may have several subcategories with their own peculiar problems, it said. Hence, the Ministry decided consciously against a “one size fits all” approach vis-à-vis the problems of the banking sector and its stake-holders.
There were as many types of borrower as banks, it said. In banking sector when financial assistance is rendered by way of loans, a balance has to be maintained with the interest of crores of depositors, most of whom are merely depositors and surviving on the interest they receive on their deposits.
On an approximate basis, there are over 197 crore deposit accounts in the country in commercial banks alone, in which depositors have deposited their money and are earning interest, it said.
To mitigate the burden of debt servicing brought about by disruptions on account of the COVID-19 pandemic, the RBI has (vide circulars dated 27.3.2020 and 23.5.2020) permitted lending institutions to grant a moratorium on payment of all instalments, including interest, of term loans falling due between 1.3.2020 and 31.8.2020; and/or defer recovery of interest on working capital loans for the period from 1.3.2020 to 31.8.2020.
These permit lending institutions to — (a) grant a moratorium on payment of all instalments of term loans falling due between 1.03.2020 and 31.08.2020; and (b) defer recovery of interest on working capital loans for the period from 1.03.2020 to 31.08.2020.
Under these circulars, a moratorium on payment of both principal and interest is by its very nature a temporary standstill arrangement which gives relief to the borrower in the following two ways: (i) The account does not become NPA despite non-payment of dues; (ii) Credit Information Companies shall ensure that the moratorium does not adversely impact the credit history of the borrowers.
The bank continues to incur cost on its deposits and borrowings during this period.