RBI opposes extension of loan moratorium: will affect credit discipline


Written by Ananthakrishnan G | New Delhi |

Updated: October 11, 2020 2:26:57 am


The Resolution Framework for Covid19-related stress, which was announced on August 6, 2020, provides a “more durable solution,” the RBI said. (File photo)

The Reserve Bank of India has told the Supreme Court that the continuation of the loan default period beyond the six months already granted may affect overall credit discipline, and small borrowers will eventually feel the rush.

The central bank has also urged the high court to lift its provisional order suspending the reporting of accounts as non-performing assets (NPA), saying this will have “huge implications for the banking system, as well as undermine” its “regulatory mandate.”

In a new affidavit filed in the Supreme Court, which is hearing a plea on the question of charging interest on interest on loan repayments during the moratorium period, the RBI said that “a long moratorium exceeding six months also it can affect the credit behavior of borrowers and increase the risk of delinquency after the resumption of scheduled payments. It can result in vitiating overall credit discipline, which will have a debilitating impact on the credit-building process in the economy. It will be the small borrowers who end up bearing the brunt of the impact, since their access to formal lending channels depends fundamentally on the credit culture ”.

Explained

RBI concern: its mandate and its banking system

The RBI has argued against extending the loan moratorium beyond six months, and has also asked the Supreme Court to lift the suspension imposed on declaring accounts as NPA beyond August 31. The RBI is of the opinion that this will have huge implications for the banking system and also undermine its regulatory mandate.

A “more durable solution,” the RBI said, is provided by the Covid-19 Stress Resolution Framework, announced by it on August 6, which “allows lenders to implement a resolution plan with respect to the personal loans and other exposures affected by Covid-19, subject to prescribed conditions, without degradation of the asset classification. The framework, among other things, allows the extension of the moratorium for a maximum of two years “.
Earlier, the Union Ministry of Finance, in its affidavit, had told the court that the government had decided to waive interest on interest in respect of MSMEs and other personal loans of up to Rs 2 million during the period of six-month moratorium.

The RBI said that “continuing the temporary moratorium” beyond the six-month period already allowed “would not even benefit borrowers. It may not be enough to address deeper borrowers’ cash flow issues, and indeed , exacerbate repayment pressures on borrowers ”.

“Therefore, a more durable solution was needed to rebalance the debt burden of viable borrowers, both businesses and individuals, relative to their cash flow generation capabilities. With this consideration in mind, the Reserve Bank announced the Covid-19 Stress Resolution Framework (“Resolution Framework”) on August 6, 2020, ”it said.

On September 3, the Supreme Court ordered that accounts that have not been declared as NPA as of August 31 not be declared so until new orders are issued.

The RBI urged the court to lift this “blanket suspension” “immediately” because if it is not done “it will have huge implications for the banking system, in addition to undermining” its “regulatory mandate.”

The RBI said that it “has taken a balanced view, taking into account the interests of depositors, borrowers, real sector entities and banks. The financial stability and economic growth of the country were also taken into account when reaching its policy decisions by the Reserve Bank ”.

It noted that according to the proposed Resolution, only those borrower accounts, which were classified as standard, but were not in arrears for more than 30 days with any credit institution as of March 1, 2020, will be eligible for resolution. Among other things, it may include rescheduling payments, converting any accrued or accrued interest to another line of credit, or granting a moratorium, based on the assessment of the borrower’s income streams over two years.

The RBI disagreed with the argument that accounts that were standard but overdue more than 30 days as of March 1, 2020 should also be considered eligible for the Resolution, as they may also have been affected by Covid-19.

“This is a classic composition fallacy that assumes that accounts that pay on time can be equated with accounts that pay with considerable delay. An account that was affected by a pandemic and that had a pre-existing financial situation has a different risk profile compared to an account without pre-existing stress and treating both borrowers on an equal footing would be a serious suspension of financial sensitivity, ”he said. . .

Some petitioners had requested instructions from the RBI to announce sector-specific reductions.

Responding to this, the RBI said that “such sentences deliberately conceal the fact that the Resolution Framework grants full discretion to lenders and borrowers to come up with resolution plans that are tailored to the specific requirements of the sector subject to prudential limits. specified therein “.

He noted that the MV Kamath Committee recommended “sector-specific thresholds for mandatory financial parameters, which are more liberal than normal loan financial benchmarks, which should be considered in financial projections when designing resolution plans.”

He said that the circular of September 7, 2020 (notifying the recommendations) sets “separate thresholds for 26 sectors, including energy, real estate and construction. Even in the energy sector, separate thresholds have been prescribed for the generation, transmission and distribution sectors. Similarly, separate thresholds have been prescribed for the residential and commercial real estate sectors ”.

“Sectors such as energy and real estate were already stressed even before the pandemic due to various factors related to specific problems in the sector,” said the central bank, adding that “problems in the real sector cannot be solved through regulations. banking. RBI banking regulations cannot substitute for solving structural problems in the real sector ”.

“In any case, the projects in execution that are affected by the consequences of Covid-19 can be restructured under an already existing framework. This existing framework allows to extend the timeline for project completion by 2 years for non-infrastructure projects, including real estate projects, and by 4 years for infrastructure projects without downgrading NPA, ”he said.

The government, according to the RBI affidavit, had also taken several steps to address some of the sectoral issues, including creating a special Window for completion of affordable and middle-income housing (SWAMIH Investment Fund) to provide priority financing. debt for the completion of stagnant housing projects.

“The recommendations were widely accepted by the Reserve Bank and, consequently, the Reserve Bank issued the circular dated September 7, 2020 notifying the same,” he said.

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