On March 27, 2020, the Reserve Bank of India (RBI) governor, Shaktikanta Das announced a comprehensive action plan to resuscitate the economy devastated by the Corona virus. Apart from measures to increase availability of credit and reduction in the cost of capital, the plan sought to ease the stress of loan repayments on businesses and individuals. Amongst others, this included 3-month moratorium on payment of installments in respect of all term loans outstanding on March 31, 2020. On May 22, 2020, Das announced extension of the moratorium for three months till August 31, 2020.
To ease the burden of payment on those who availed of working capital facilities, the governor allowed them to convert accumulated interest for the deferment period into a funded interest term loan (FITL) which can be paid by March 31, 2021.
The RBI also eased asset classification norms for all accounts coming under moratorium. These accounts will be treated as non-performing assets (NPA) from 270 days overdue instead of 90 days overdue as per extant rule. It has also extended the 210-day resolution period for all large stressed accounts under its June 7, 2019 circular (on its expiry, if banks are not ready with resolution plan, the Insolvency and Bankruptcy Code comes into play) by a further 180 days.
To address the woes of businesses even after the moratorium ends, on August 6, 2020, the RBI announced scheme for one-time restructuring of the debt for large companies besides extending till March 31, 2021 an existing scheme for micro, small and medium enterprises (MSME) with relaxed norms. It also set up an expert committee under KV Kamath to recommend the required financial parameters, along with the sector-specific benchmarks for this special window. The committee has recently submitted its recommendations.
Meanwhile, one Mr Gajendra Sharma (an Agra resident) had filed a public interest litigation (PIL) in the Supreme Court (SC) ‘demanding waiver on interest charged by a private bank’ citing relief given by RBI on the payment of EMIs during March and August 31, 2020 due to pandemic’. The matter has been under consideration by the SC during the last 3 months or so. In this regard, a three judge bench has made following observations:-
On June 4, 2020 it said “On one hand, you are granting moratorium (on loans) but continuing with interest. It is more detrimental.” On June 17, 2020, it observed “There is no merit in burdening customers, who have opted for the RBI-approved loan moratorium, with additional interest. Once you fix a moratorium it should serve the purpose desired. We see no merit in charging interest on interest.”
On September 10, 2020, it said “we are keen to waive interest on interest” for borrowers who availed themselves of the moratorium and asked the government and RBI to come up with a ‘concrete plan’ with regard to the vexed issue. It posted the matter for hearing on September 28, 2020 when it is likely to give its final order.
From the above, it is abundantly clear that the SC does not want banks to charge interest on interest for the moratorium period. Whether or not, this will get reflected in its order, one can only wait and watch. Meanwhile, it may be worthwhile to look at the desirability or otherwise of such a move in particular, its impact on the financial stability of the banking system.
At the outset, by granting moratorium to all and sundry, the RBI gave a signal that almost everyone would be devastated by the pandemic. The SC went a step further by aligning itself with a plea that the banks should also not be charging ‘interest on unpaid interest amount during the moratorium period’. Such a sweeping and broad-based generalization is totally divorced from the reality.
No doubt, Corona has caused unprecedented damage but this can’t be pushed to a point of arguing that almost everyone has been incapacitated and hence unable to service the loans. After all even during the lock-down, a number of activities especially health related, all essential items besides several firms permitting work from home (WFH) continued. Look at gross domestic product (GDP). During April – June 2020 it was 25% less than during April – June 2019 but it was not reduced to zero.
Businesses which contributed to this GDP (about Rs 3750,000 crore during April – June 2020) can’t be termed as not being in a position to service their loan. The proof of pudding is in the eating. A large number of borrowers have not availed of the moratorium. For instance, in case of the State Bank of India (SBI), over 80% of its retail borrowers did not avail of the moratorium for 2 out of the first 3 months (read: March – May, 2020) initially allowed by RBI. Further, 90% of such borrowers did not avail of the moratorium for one month. In other words, they continued to pay their EMI.
Notwithstanding the above, if in retrospect, the SC allows waiver of ‘interest on unpaid interest amount’ for all and sundry, this will not only be untenable but also discriminate against those borrowers who decided not to avail of the moratorium and continued to service their loans ( unless the court also directs banks to reimburse to them ‘interest on interest’ which is unlikely).
A business by nature has ups and downs. Every enterprise has a phase of buoyancy when it gets to reap extraordinary profit (for instance, in automobile sector during 2017-18/2018-19). What prevents it from using that surplus to pay for the current loss? Likewise, in future say 2022-23 when the pandemic impact subsides and it starts generating good profit that can be used to pay for current liabilities. For any firm to enjoy the fruits when the going is good and come to the government for bail out when in crisis is totally unacceptable.
A bank does not run charity. Its business model involves taking money from depositors in lieu of promising a fixed return (call it interest rate) which is added to the invested amount and returned to the depositor on maturity. The bank on-lends the funds thus collected to borrowers viz. industries, businesses or individuals etc and uses the interest earning there from to service its depositors (besides paying for its own ‘intermediation’ expenses).
The bank is legally bound to honor its contractual obligation to the depositor i.e. it must return to him/her the principal amount plus accrued interest on the maturity/due date. Imagine a situation wherein, it defers payment of the interest portion say by 6 months (because it is under stress for that long) then, it will necessarily have to pay ‘interest on the unpaid interest amount’. The depositor won’t forego this just because the bank was under stress.
This logic will hold with equal force when it comes to the borrower discharging his liabilities to the lender. If, the former delays payment of interest (courtesy, moratorium mandated by RBI due to Covid – 19) then, it must pay ‘interest on unpaid interest amount’ to the latter. Yet, if the top court forces banks to forego it, this will dent their ability to service the depositors. It will pose a serious threat to the viability of the banking system.
Undoubtedly, businesses can always come to the banks for support by way of additional funding at reasonable interest rate and negotiate for changes in the terms of payment. This is precisely what the RBI is facilitating by way of one-time restructuring schemes (26 sectors have been identified by Kamath committee for customized package). But, to expect the banks to bear a portion of the cost in a broad-side and high handed manner is an abhorrent idea.
For them to expect the government to pick up the cost tag also does not make any sense and must be rejected outright. Apart from Covid – related expenses on medical facilities and health infrastructure (besides increasing expenditure on defense in the current security environment), the latter’s scarce resources need to be committed only for addressing basic needs of the poor whose survival depends on daily wages and who – unlike firms – had neither any savings from the past nor have any hope of generating extra income in the future.
To sum up, the approach alluded to by the SC in dealing with the demand put up by the petitioners may not be in the best interest of maintaining the viability of banks and protecting country’s macro-economic fundamentals. From the perspective of businesses, the most crucial requirement is to ‘flatten’ the Covid – 19 curve at the fastest pace. Sans this, relief on any other front won’t be of much help.