Moratorium period exceeding 6 months may result in vitiating overall credit discipline: RBI to SC

A loan moratorium exceeding six months might result in “vitiating the overall credit discipline”, which will have a “debilitating impact” on the process of credit creation in the economy, the Reserve Bank of India has told the Supreme Court.

In an affidavit filed in the apex court in the loan moratorium case, the RBI has said that a long moratorium period could impact credit behaviour of borrowers and increase the risks of delinquencies post resumption of scheduled payments.

In its affidavit, the RBI has said that any waiver of interest on interest would entail “significant economic costs” which cannot be absorbed by the banks without serious dent of their finances, and this, in turn, would have huge implications for the depositors and the broader financial stability.

“The Union of India vide its affidavit dated October 2, 2020, has submitted before the court the decision of the government to bear the cost of the ‘interest on interest’ for MSME loans and personal loans up to Rs 2 crore. This decision by the government to provide additional relief to a large segment of borrowers has addressed the primary prayers of the petitioners,” the affidavit said.

It said, “A long moratorium exceeding six months can also impact the 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 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 affidavit said.

The RBI has said that mere continuation of the temporary moratorium would not even be in the interest of borrowers.

It has also said that the apex court’s interim order of September 4, restraining classification of accounts into non-performing accounts in terms of the directions issued by the RBI, may kindly be vacated with immediate effect.

“It is humbly submitted that this court had given an across the board stay on the classification of any account as NPA till further orders. 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,” the affidavit said. It said many petitioners have prayed for directions to the RBI to announce sector-specific reliefs instead of a “monolithic” resolution framework. “Such prayers deliberately obfuscate the fact that resolution framework gives complete discretion to lending institutions and borrowers to arrive at resolution plans which are tailored to the specific requirements of sector subject to the prudential boundaries specified therein,” it said.

It said the RBI has announced multiple sets of guidelines since March this year to respond appropriately to the evolving situation with the primary objective of enabling all key constituents in the economy, most importantly the borrowers, to cope with the economic fallout.