RBI has said that a long moratorium greater than six months can impact borrowers’ credit behavior and increase the risk of default after scheduled payments resume.

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Moratorium | Reserve Bank of India | Supreme Court

The Reserve Bank of India, in an affidavit filed with the Supreme Court in the loan moratorium case, said it would not be possible to allow more time to relieve areas affected by the coronavirus pandemic. The Center made it clear that further relief was not possible beyond waiving interest on interest for certain categories of loan accounts that have borrowed up to Rs 2 crore. In the affidavit, RBI told the Supreme Court: “The resolution framework released by the Reserve Bank on August 6, 2020 aims to facilitate the revival of real sector activities and mitigate the impact on end borrowers, who are under financial pressure caused by the economic fallout from the Covid-19 pandemic. “ “In terms of the resolution framework, only borrower accounts will be eligible for resolution that have been classified as standard, but not in default for more than 30 days with a credit institution as of March 1, 2020.” RBI added that “a long moratorium longer than six months can impact borrowers’ credit behavior and increase the risk of default after scheduled payments resume. This can have the effect of vitiating the overall discipline of credit, which will have a debilitating impact on the process of credit creation in the economy. Small borrowers will ultimately bear the brunt of the impact, as their access to formal lending channels critically depends on the credit culture. ” Moreover, simply maintaining a temporary moratorium would not even be in the interest of borrowers.

This may not be enough to resolve borrowers’ deeper cash flow problems and, in fact, exacerbate repayment pressures for the borrower. Therefore, a more sustainable solution was needed to rebalance the debt burden of viable borrowers, both businesses and individuals, against their cash-generating capacities.

Regarding non-performing assets, RBI urged the Supreme Court to lift the suspension of the classification of any account as NPA. RBI said: “If the suspension is not lifted immediately, it will have huge implications for the banking system, in addition to undermining the regulatory mandate of the Reserve Bank of India, restricting the classification of accounts as NPA based on of the instructions issued by the RBI, be rescinded with immediate effect. “ The Reserve Bank also said the government’s decision to provide additional relief to a large number of borrowers answered the petitioners’ key pleas.

The Ministry of Finance had filed a further affidavit in the Supreme Court on October 2, claiming that it had decided to waive the compound interest (interest on interest) charged on loans of up to Rs 2 crore for a moratorium of six. month granted to individual borrowers as well as to medium-sized enterprises. and small industries.

Kamath’s panel made recommendations for 26 sectors that could be considered by lending institutions when finalizing loan resolution plans and said banks could take a graduated approach depending on the severity of the crisis. coronavirus pandemic in an area.

Initially, the RBI issued the circular on March 27 which authorized credit institutions to grant a moratorium on the payment of maturities of term loans maturing between March 1, 2020 and May 31, 2020, due to the pandemic.

Later, the moratorium period was extended until August 31 of this year.