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Loan Moratorium- Resolution Framework For COVID-Related Stress More Restrictive Than Prudential Norms For Normal Times: SC Told
Mehal Jain
17 Dec 2020 8:02 PM IST
In the course of the hearing in the loan moratorium matter, the Supreme Court was informed on Thursday, on behalf of an industry group, that the interests of borrowers have been dealt with in a "slipshod manner" and not "with as much sympathy as was expected", by the Union of India and the RBI.Senior Advocate Ravindra Srivastava, for the group, told the bench of Justices Ashok Bhushan, R....
In the course of the hearing in the loan moratorium matter, the Supreme Court was informed on Thursday, on behalf of an industry group, that the interests of borrowers have been dealt with in a "slipshod manner" and not "with as much sympathy as was expected", by the Union of India and the RBI.
Senior Advocate Ravindra Srivastava, for the group, told the bench of Justices Ashok Bhushan, R. Subhash Reddy and M. R. Shah that the banks are "prevailing over" the government and the RBI and "making huge profits".
"Any relief under the Disaster Management Act will involve costs. They can be no relief without costs", he advanced.
As regards the mitigation measures qua the borrowers of the lending institutions, he indicated that the March 27 circular of the RBI had allowed for a moratorium for a period of three months initially, which was again extended by three months, making it a total of six months. He pointed out that the circular says that interest will not continue to run and will be accumulated and, secondly, that there will be interest on interest. "This is what is bothering the borrowers. Your Lordships need to examine the legality of these measures, considering that the RBI itself has said that this provision of interest on interest is in the nature of penal interest. Whether under the DM Act it can be done? No authority is looking into the grievance of borrowers...", he remarked.
He explained that the government of India and the RBI have come up with two-fold measures, the first being the October 23 scheme by virtue of which compound interest on loans up to Rs. 2 crores has been waived, and secondly, the resolution package suggested by the RBI vide its August 6 circular.
Mr. Srivastava argued that while the Kamath committee had mentioned 26 sectors as having been severely-impacted during the Covid pandemic, the waiver of compound interest has been extended to only eight segments of borrowers. "The 26 sectors include the power and the real estate sectors, as against yesterday's argument (by Senior Advocate Harish Salve for the Indian Banks Association) that these two sectors are not 'persons affected by disaster' (for the purpose of the DM Act...now only 8 segments have been extended the benefit. This classification of the amount of loan is discriminatory and arbitrary. But this submission was not answered", he said.
As regards the resolution framework for COVID-related stress under the RBI circular, he argued that this measure is much more restrictive and "nothing at all has been given".
RBI Circular on Prudential Norms for Resolution v/s RBI Circular on Resolution Framework for COVID-related Stress
He took the bank through the RBI circular on prudential norms which deals with stress loans in normal circumstances dehors the Covid pandemic. He pointed out that the prudential norms do not provide any classification of borrowers, sector wise or segment wise. There is no time-limit for the invocation of the resolution plan. By way of another radical difference, he pointed out that under the COVID circular on resolution packages, it is only the banks on their own, when they notice that an account is under stress, suo motu start action against the borrower and suggest resolution, and that the borrowers cannot themselves apply for the invocation.
As regards the scope of the solution under the prudential norms which govern the resolution and restructuring in normal times, he pointed out that the relief measures include the reduction of the payable amount, reduction of the instalments and the rate of interest can be reduced, a sanction of additional credit facilities and compromise settlements where the time for payment exceeds three months.
Taking the bench through the August 6 circular of the RBI, Mr. Srivastava showed that the resolution plan may include only rescheduling of payments, conversion of the interest accrued as another borrowing facility, grant of a moratorium for a maximum of two years. "Your Lordships, please look at how restricted it is as compared to the measures the prudential norms contemplate", he advanced.
'SBI, largest lender in the country, only offering moratorium, and that too at an additional interest, with further restricted eligibility'
Next, he walked the bench through policy circular issued by the SBI in pursuance of the August 6 RBI circular- "No other bank has placed its policy on record. We can only look at the SBI policy. And even in this case, nowhere is it stated that the board has approved this policy"
As regards personal loans, he showed that the scope of the resolution plan, so far as the SBI is concerned, is moratorium up to 24 months where income is affected; rescheduling of payments for a maximum of two years; and their proposal to charge 35 BPS as additional interest on all loans concerned under the framework.
"So the only relief by the SBI, the biggest lender in the country is moratorium. And they are not only charging interest but also additional interest. Their submissions before this court that they are holding the hands of the people is a complete eyewash", he contended.
Mr. Srivastava took the bench through responses to the FAQs formulated by the SBI as regards its COVID resolution plan- In answer to the question 'Upto what date can I apply for relief under the framework', he showed that the SBI says 31st December. As regards what relief and relaxation is available, Mr. Srivastava showed that the SBI's answer was moratorium of 24 months and rescheduling of repayment, instalments, extension for a maximum of two years. Then he showed that as regards the FAQ, 'Will there be any change in the pricing of my loan?', the response was 'Yes. 35 BPS additional interest will be charged to offset the partial cost of additional provisions required to be made by the bank'.
"Why will anyone take moratorium with the compound interest, the additional interest and the interest on interest? Particularly when people have already burnt their fingers once?", he commented.
Mr. Srivastava advanced that the SBI has put additional conditions of eligibility which were not even envisaged by the RBI – MSME borrowers with loans of Rs. 25 crore or less are not entitled to the resolution and even other segments like primary agriculture is excluded; Under personal loans, staff loans are not eligible.
"The RBI can't leave it to the banks to do everything, to identify their own individual policies under its August 6 circular. How do we question this discretion of the sanctioning authority?", asked Mr. Srivastava. He relied on section 35AB of the Banking Regulation aAct which empower the RBI to issue directions to banks in respect of stressed assets.
Moreover, he indicated that per the SBI policy, even the application for the resolution plan is to be in a specific format, stating that one is COVID-affected person. Besides, the application has to be accompanied by documentary proof of salary slips, letter of termination, discharge, notarised affidavits etc. "So you can't just make a call to the bank by December 31 that you want to invoke the resolution plan. This is unlike what the RBI had envisaged. There is a discord between the RBI and the banks. This is a case where the NDMA should have stepped in rather than leaving it to the individual banks!", he argued.
As regards the 'date of invocation' of the resolution plan in terms of the SBI circular of September 1, he indicated that the date on which the bank conveys to the borrower that the bank is agreeable, in principle, to implement the resolution package is to be the 'date of invocation'.
"If RBI has taken a different view, then all the banks will have to follow", noted Justice Bhushan.
Mr. Srivastava argued that the last date to apply for the relief under the framework has been cited by the SBI as November 15 for loans of Rs. 15 crores and above and November 30 for others, while the SBi has stated that it is advisable to submit even the latter by November 15.
"The date should be available to everyone. We will clarify this", assured Justice Bhushan.
"There is no rational to fix the last date for invocation. The prudential norms don't stipulate any cut-off date. December 31 is arbitrary", contended Mr. Srivastava.
The bench pointed out that the process cannot be unending. Justice Bhushan observed that the prudential norms can be open-ended, while here, the norms have been brought in for the specific purpose of the pandemic.
Mr. Srivastava argued that this pandemic is having a continued effect, that there may be some borrowers who may not feel impacted by it till December 31, those who may feel that they will manage, but suddenly after December 31, the situation may go out of their hands and they may want to apply then. "Somebody's economic position and financial viability may be good. But this is not like the statute of limitation. There may be more cases which will need a resolution post December 31", he urged.
The Role of the NDMA
Moving further, the senior counsel repeated that the lawyers are not best-suited to assist the court as regards the appropriateness of the concessions in this complex situation, and that it is the NDMA which is the highest body (being headed by the Prime Minister) on which power has been conferred to consider the same. "The NDMA was supposed to conduct an objective study of the empirical data. No such exercise has been shown. The Union of India said that the NDMA lacks expertise so it has not stepped in. So it is common knowledge that the NDMA has not acted under section 13 (of the DM Act). No inputs from banks or other stakeholders or the Ministry of finance have been obtained to frame the policy. We are not talking of a complete waiver, but callibrative exercise needed to be done", he submitted.
He pointed out that the business of the NDMA is to be contracted through meetings of all the members. "The Ministry of Finance had sought its recommendation on August 20 and within hours, on the same working day, this authority, comprising multiple members including the PM, supplied its views and recommendations. There was no application of mind. The excerpts of its views and recommendations (as placed before the court) are not even authenticated. It seems to be the exact reproduction of the case of the Union of India and the RBI. Nobody has signed it. It cannot even be called the minutes of the NDMA. Even section 4 (of the DM Act) says that there has to be a meeting. Section 68 speaks of authentication by an officer of the NDMA. The use of the term 'views and recommendations' is not sufficient; they have to meet, deliberate and then take a call!", he advanced.
Mr. Srivastava averred that SG Tushar Mehta had stated that the recommendations of the Kamath Committee were implemented. But, Mr. Srivastava pointed out, the Kamath Committee was only supposed to work out the modalities as to what sectors have been affected and the financial parameters for the resolution packages. It was not to lay down relief, he stressed.
"The August 6 circular is not enough as a relief or concession", he reiterated.
Mr. Salve had made an argument on Wednesday that the DM Act contemplates the NDMA only in a recommendatory role, while the actual management is left to the ministries and departments of the government. "This argument virtually demolishes the structure of the Act. Section 13 has become a dead letter in the statute. It has become nugatory", said Mr. Srivastava.
He pointed out that within the meaning of section 6 of the Act, the power has to be exercised by the NDMA, in as much as the section reads that "the National Authority shall have the responsibility for laying down the policies, plans and guidelines for disaster management for ensuring timely and effective response to disaster". There is no element of any discretion as the word 'shall' has been used. The central government and the ministries have to carry out the work.
"When the power is conferred on a high authority, the statute uses the word 'may' by way of deference to the authority. That is why the word 'may' has been employed in section 13. But this does not mean that the NDMA won't do anything and leave everything to the ministries", he explained.
"When a disaster takes place, the immediate impact is felt on the financial viability of individuals and entities. That is why relief in the repayment of loans or for grant of fresh loans to the persons affected by disaster has been envisaged by the legislature (in section 13, DM Act). Relief is not limited to this. The NDMA had to apply its mind to what you can include. But this exercise is not carried out", it was argued.
He drew the attention of the bench to an article in the Economic Times where a financial expert has examined the effect of the waiver of compound interest on loan amounts of Rs. 30 lakh, 50 lakh and 70 lakh. The article claims that the actual benefit of the waiver is only to the extent of a little over Rs.1000 2000 and 4000 respectively.
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