Extension of Moratorium Beyond Six Months Unsustainable: RBI tells the Apex Court

After the Finance Ministry decided to grant relief to individual borrowers as well as medium and small industries by agreeing to waive compound interest (interest on interest) charged on loans of up to Rs. 2 crores for a six-month moratorium period announced due to the pandemic. 

The Supreme court had asked the Centre and the Reserve Bank of India (RBI) to place on record the K V Kamath committee‘s recommendations on debt restructuring.  The Kamath committee suggested parameters that banks may consider for approving loan resolution plans. The severity of the impact created by the pandemic on a particular sector must be given due consideration while framing such schemes as per the committee report. 

Extension of the loan moratorium introduced in light of the pandemic is unsustainable

RBI filed an additional affidavit before the Supreme Court, in its affidavit, it stated that an extension of the loan moratorium introduced in light of the pandemic beyond a period of six months is unsustainable and poses a risk to lenders. 

If the moratorium period is extended beyond six months, the same can also vitiate overall credit discipline. 

Due to a long moratorium, credit behaviour of borrowers may be affected. It also poses a risk of delinquency in terms of repayment when scheduled payments are resumed. The impact of which may trickle down to small borrowers. 

Warning about the risks, the RBI stated, "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 which may end up bearing the brunt of the impact as their access to formal lending channels is critically dependent on the credit culture."

The central bank requested the Court to lift its stay on classifying defaulting accounts as NPAs

The central bank requested the Court to lift the stay that it imposed on classifying defaulting accounts as non-performing assets (NPA), if the Court does not do so, the central bank’s regulatory powers would be affected.

The bank said, "If the stay is not lifted immediately, it shall have huge implications for the banking system, apart from undermining the regulatory mandate of the Reserve Bank of India."

RBI concluded by stating that since the grievances of the petitioners stand addressed with all the steps taken thus far, the petitions deserve to be dismissed for being devoid of merit.