loan moratorium

Loan Moratorium Is Fiscal Policy Matter, Govt Has Required Steps Taken: Centre To SC

The bench also heard submissions of senior advocate A.M. Singhvi who referred to issues on the power sector, especially power generation companies.

New Delhi: The Centre on Thursday told the Supreme Court that issues pertaining to loan moratorium because of the COVID-19 pandemic is a fiscal policy matter and the government has taken various proactive steps keeping in mind different sectors.

While apprising the apex court about the steps and measures taken so far by the Union finance ministry and the Reserve Bank of India (RBI), the Centre told a bench headed by Justice Ashok Bhushan that it is not a case of no action and no further indulgence may be given even if the petitioners say that there could be a better option on this issue.

The bench, also comprising Justices R.S. Reddy and M.R. Shah, was told by solicitor general Tushar Mehta that to ask for sector-specific reliefs from the top court now is perhaps not a remedy available under Article 32 of the constitution of India.

The apex court was hearing a batch of petitions relating to charging of interest on interest by banks on EMIs, which were not paid by the borrowers who availed of the loan moratorium scheme given the pandemic.

The RBI had on March 27, 2020, issued the circular which allowed lending institutions to grant a moratorium on payment of instalments of term loans falling due between March 1, 2020, and May 31, 2020, due to the pandemic. Later, the moratorium was extended till August 31 this year.

The RBI and the finance ministry have already filed separate additional affidavits in the top court saying that the banks, financial and non-banking financial institutions will credit into the accounts of eligible borrowers by November 5 the difference between compound and simple interest collected on loans of up to Rs 2 crore during the moratorium scheme period.

During the hearing conducted through video-conferencing on Thursday, Mehta told the bench that it is the responsibility of banks to credit the difference between compound and simple interest collected on loans of up to Rs 2 crore during this period.

He said the disaster management authority has taken all the steps which were required to be taken by it and the NDMA has already done what it could have under the law.

Also read: Explained: The Upside and Downside of the Centre’s Proposal to Waive ‘Interest on Interest’

Centre has proactively taken steps through the finance ministry and the RBI, Mehta said, adding, “These are all fiscal policy matters.”

He said if the court is satisfied that the government is examining these issues, taking adequate steps and grievance redressal mechanism lies within the system itself then further indulgence was not required.

It is not a case of no action, the solicitor general said, adding, “The government is on top of it.”

He said that several relief measures were announced and decisions were taken by the concerned authorities keeping in mind every sector.

Mehta referred to the special economic and comprehensive Atmanirbhar Bharat package of Rs 20 lakh crore announced by the government in May and other relief measures to fight the pandemic.

The bench also heard submissions of senior advocate A.M. Singhvi who referred to issues pertaining to the power sector, especially power generation companies.

The apex court asked him to give his suggestions to Mehta as well as the counsel appearing for the RBI.

Mehta and senior advocate V. Giri, who was appearing for RBI, told the bench that there are different petitions before the apex court on the issue and the lawyers may give short submissions to them so that they may respond.

We permit counsel for the parties to submit their short submissions/suggestions to counsel for the RBI as well as solicitor general within three days, the bench said and posted the matter for further hearing next week.

On November 5, the RBI had urged the apex court to lift its interim order, which held that accounts not declared as non-performing assets till August 31 this year are not to be declared NPAs till further orders, saying it was facing difficulty due to the directive.

In a relief to stressed borrowers who are facing hardships due to the impact of COVID-19 pandemic, the apex court had passed the interim order on September 3.

The pleas pertained to the charging of interest on interest by banks on EMIs which have not been paid by borrowers after availing the loan moratorium scheme of RBI from March 1 to August 31.

Earlier, the RBI had filed the affidavit saying that it has asked all banks, financial and non-banking financial institutions to take “necessary actions” to credit into the accounts of eligible borrowers the difference between compound and simple interest collected on loans of up to Rs two crore during the moratorium scheme.

Before this, the central government had told the apex court that lenders have been asked to credit into the accounts of eligible borrowers the difference between compound and simple interest collected on loans of up to Rs 2 crore during the RBI’s loan moratorium scheme by November 5.

The government had said that the ministry has issued a scheme as per which lending institutions would credit this amount in the accounts of borrowers for the six-month loan moratorium period which was announced following the COVID-19 pandemic situation.

Centre’s ‘Interest on Interest’ Waiver Proposal Will Add Costs, Spark Litigation: Bankers

The proposal aims to waive the compounded interest component on small business loans and some personal debts from March to August.

Mumbai: Bankers fear the government’s decision to waive some interest payments on loans under a COVID-19 support plan will create unnecessary work for lenders and lead to more litigation, without providing much of a boost for the sagging economy.

In an October 2 filing with the Supreme Court, seen by Reuters, the government said it is amending a controversial clause in a relief plan that allowed distressed borrowers to skip repayments for six months but then charged them “interest-on-interest” on the delayed payments, putting them deeper in debt.

The change will waive the compounded interest component on small business loans and some personal debts from March to August.

The government will bear the cost, which could be as high as $1 billion, according to analysts.

But for lenders saddled with over $120 billion of bad loans and a coronavirus-induced collapse in demand, the move will further pressure already stressed balance sheets.

In the case of a similar scheme for farm loans, banks typically need to wait nine to 24 months to get the funds from the government, two bankers said.

Lenders also will need to recalculate millions of loans, according to interviews with four bankers and a lawyer.

“Getting the money back from the government is a painful exercise,” said a senior banker at one of the NBFCs.

“At the end, a lot of work will happen, nobody will be happier and the government will be poorer.”

A finance ministry spokesman declined to comment, citing ongoing legal proceedings.

Also read: Explained: The Upside and Downside of the Centre’s Proposal to Waive ‘Interest on Interest’

Banks’ legal costs are also on the rise as lawsuits pile up.

“The state-owned banks may show government support, but the private lenders are in it for the profit. They will have different calculations and those calculations will be challenged by the government,” said the lawyer.

A banker at a private lender added: “That is the problem with such waivers, because where does it end?”

Bankers are also concerned that waivers may distort the culture of lending in India and argue that there are other ways to help borrowers who are in need, such as providing subsidies or loan restructuring.

“Now, in case of a flood or any other situation, even borrowers who can pay may not be keen to do so because they know the government will step in to rescue them,” said a senior banker at a public sector lender.

(Reuters)

Explained: The Upside and Downside of the Centre’s Proposal to Waive ‘Interest on Interest’

The SC said the Centre’s affidavit on waiving “compound interest” on loans up to Rs 2 crore under moratorium fails to deal with several issues raised by petitioners.

New Delhi: The Supreme Court on Monday said the Centre’s affidavit on waiving off “interest on interest” on loans up to Rs 2 crore under the moratorium fails to deal with “several issues raised by petitioners” and was not satisfactory.

Therefore, the apex court has asked the government and the Reserve Bank of India to file an additional affidavit within a week. The matter will be next heard on October 13.

What does the government’s affidavit say?

On March 27, the RBI said that banks would be allowed to grant a moratorium on term loan EMIs due between March 1 and May 31. It was later extended for another three months, until August 31. This relief was provided by the central bank to shield businesses from the economic impact caused by the COVID-19-induced lockdown.

The government in its affidavit submitted to the apex court on Friday said that it is willing to waive off compound interest for all borrowers with loans up to Rs 2 crore, specifying that the cost of the waiver would be borne by the government. The government said that the relief will be limited to only vulnerable category of borrowers.

It is proposing to waive “interest on interest” on loans less than Rs 2 crore for education, consumer durables, housing, credit card, auto, consumption, personal loans, and MSMEs.

The affidavit clearly stated that this relief would be applicable to “all borrowers irrespective of whether they availed of the moratorium or not”.

However, it did not provide any clarification on how the relief will be provided to those who have not availed of the moratorium, neither did it distinguish between borrowers who have availed of the moratorium partially or fully.

How much cost is the government expected to bear?

Assuming not more than 30-40% of banks and NBFCs will be eligible for the relief, the government should not exceed Rs 5,000-7,000 crore, BloombergQuint said in a report, quoting Anil Gupta, head, financial ratings at ICRA.

While referring to the costs of a broader interest waiver, the government in its affidavit mentioned that if it were to consider interest on all loans and advances corresponding to the six-month period for which loan moratorium was made available, the estimated amount would be Rs 6 lakh crore.

This would be an exorbitant amount, which explains the need to limit the proposed relief to certain categories and loan values. .

Also read: From Bounty to Dampener, the Tale of RBI’s Dividend to the Indian Government

How justified are the contours of the proposal?

While nobody can argue that vulnerable borrowers need relief and that the cost of providing this relief also prevents further negative ripple effects within the banking system, questions are naturally raised of any taxpayer bailout. And, more importantly, the Rs 2 crore upper limit does raise some questions on whether all borrowers are equal.

“This list is highly unjustifiable as it equates [the] unequal,” says Latha Venkatesh in an CNBC TV18 opinion piece on the proposed relif categories. For instance, an MSME that has Rs 2 crore worth of loans could be called ‘vulnerable’, but nobody would use that word to describe an individual who has taken out a Rs 2 crore loan.

Similarly, a borrower with an education loan has a different financial risk profile compared with the one who has a huge amount of credit card dues, or someone who has taken out a personal consumption loan of Rs 2 crore.

“…A person who takes a Rs 2 crore home loan can hardly be described as vulnerable. Assuming a loan-to-value ratio of 70 percent, the actual cost of the house would be Rs 2.7 crore. By what standards is a person who can afford a Rs 2.7 crore loan ‘vulnerable’. Most income taxpayers wouldn’t be able to afford a Rs 2.7 crore home. The income tax department disclosed in February this year that of the 1.46 crore people who pay income tax, one crore people have an income under Rs 10 lakhs. Most of these persons, may not in their lifetime be able to afford a house costing Rs 2.7 crore. Then why should their taxes be used to subsidise people far richer than themselves?,”

This proposal also questions how justified it is for those who continued to pay EMIs on time and did not avail of a loan moratorium.

What do experts suggest?

Ventakesh suggests that retaining the Rs 2 crore limit for MSME loans but scaling it down considerably for other categories would be a better solution. For home loans, as per the law, Rs 45 lakh is understood to be ‘affordable’.

Ira Dugal of BloombergQuint in an opinion piece suggested that the government should set at least two separate limits for such broad categories as the applicability of this will be wide.

Moratorium Period on Loan Repayment Can Be Extended by 2 Years: Centre, RBI Tell SC

The apex court had earlier asked the Centre and the RBI to review the move to charge interest on deferred EMIs during the moratorium period.

New Delhi: The Centre and RBI Tuesday told the Supreme Court that the moratorium period on repayment of loans amid the COVID-19 pandemic is extendable by two years.

Solicitor General Tushar Mehta, appearing for the Centre and the Reserve Bank of India (RBI), told a bench headed by Justice Ashok Bhushan that several steps have been taken for stressed sectors and the economy has contracted by 23 percent due to the pandemic.

The bench said that it would hear on Wednesday the pleas which have raised the issue of interest being charged on instalments which have been deferred under the central bank’s scheme during the moratorium period amid the COVID-19 lockdown.

The apex court had earlier asked the Centre and the RBI to review the move to charge interest on deferred EMIs during the moratorium period.

SC Asks Centre to Clarify Stand on Interest Waiver During Moratorium

The top court had earlier said there was “no merit in charging interest on interest” for deferred loan payment instalments during the moratorium period announced in wake of the COVID-19 pandemic.

New Delhi: The Supreme Court on Wednesday took note of the Centre’s alleged inaction and asked it to clarify its stand within a week on the waiver of interest on interest for deferred payments of instalments for loans during the moratorium period announced due to the coronavirus lockdown.

A bench headed by Justice Ashok Bhushan said the Centre had not made its stand clear on the issue despite the fact that ample powers were available with it under the Disaster Management Act and was “hiding behind the RBI”.

The apex court granted time to the government after Solicitor General Tushar Mehta sought a week’s time to file a response.

“My Lordships may not say that. We are working in coordination with RBI,” Mehta said.

The bench, also comprising Justices R. Subhash Reddy and Justice M.R. Shah, asked the solicitor general to clarify stand on the Disaster Management Act and whether additional interest on existing interest could be accrued.

Also read: ‘Moratorium Extension Will Determine Economic Recovery in India’

Mehta argued that there cannot be a common solution for all the problems.

Senior advocate Kapil Sibal, appearing for the petitioner, informed the bench that the loan moratorium’s deadline would end on August 31 and sought its extension.

“I am only saying that till these pleas are decided, the extension should not end,” Sibal said.

The apex court has now posted the matter for hearing on September 1.

The top court had earlier said there was “no merit in charging interest on interest” for deferred loan payment instalments during the moratorium period announced in wake of the COVID-19 pandemic.

The bench was hearing a plea filed by Agra resident Gajendra Sharma, who has sought a direction to declare the portion of the RBI’s March 27 notification “as ultra vires to the extent it charges interest on the loan amount during the moratorium period, which create hardship to the petitioner being borrower and creates hindrance and obstruction in ‘right to life’ guaranteed by Article 21 of the Constitution of India”.

Sharma has also sought a direction to the government and the Reserve Bank of India (RBI) to provide relief in repayment of loan by not charging interest during the moratorium period.

On June 4, the top court had sought the Finance Ministry’s reply on the waiver of interest on loans during the moratorium period after the RBI said it would not be prudent to go for a forced waiver of interest risking financial viability of the banks.

The top court had said there were two aspects under consideration in this matter – no interest payment on loans during the moratorium period and no interest to be charged on interest.

It said these were challenging times and it was a serious issue as on one hand, moratorium was granted and on the other, interest was charged on loans.

‘Moratorium Extension Will Determine Economic Recovery in India’

Christopher Wood, global head (equity strategy) at Jefferies Financial Group, suggests that moratorium could trigger a consumer lending non-performing loans cycle.

New Delhi: The decision on whether to extend the moratorium on loans till December 2020-end will be a crucial factor in determining the pace of recovery for the economy, banks and the real estate market in India, wrote Christopher Wood, global head (equity strategy) at Jefferies Financial Group, in GREED & fear — his weekly note to investors.

“A critical question for the banks, the property market and indeed the economy is now whether the moratorium is extended yet again. Still until proven otherwise, investors should probably assume that the moratorium will be extended for another four months to the end of the calendar year,” Wood said.

Still a negative from the government’s standpoint, Wood believes, is that such a restructuring would be outside the recently established bankruptcy process, though presumably the special circumstances of COVID-19 could be used to justify the move.

Earlier this year, the Reserve Bank of India (RBI) had allowed banks and financial institutions to offer a moratorium of three months on payment of instalments on all term loans, which was subsequently extended by another three months till August-end.

Wood believes moratoriums are hard to end and forbearance is forced on the banking sector, which (including NBFCs) still accounts for 19% of the MSCI India index, though down from a peak of 27% in December 2019. A moratorium, he suggests, could trigger a consumer lending non-performing loans (NPL) cycle.

“It is interesting that Indian banks have taken advantage of the recent stock market rally to announce capital raising, with $13 billion of equity raising by private sector banks and NBFCs now in the pipeline. GREED & fear would interpret this planned capital raising as primarily defensive in nature,” Wood wrote.

Real estate market

The lockdown, according to Wood, has dealt yet another body blow to the Indian residential property market where he now sees potential for forced selling of property portfolios of the stressed developers, most particularly if the moratorium is not extended beyond August.

“For now, the moratorium means that the price discovery process has stalled, particularly in the high-end residential market and in commercial property. A property consultant hosted by Jefferies’ Indian office this month estimated that such forced sales could lead to a 30% write-down in values on loans extended to the stressed developers,” he wrote.

Growth forecast

Regarding economic recovery, Jefferies expects real gross domestic product (GDP) to contract 5% this fiscal year. Those at Nomura, too, share a similar view and expect the GDP growth to remain in negative territory for the next three quarters (-5.6% in Q3CY20, -2.8% in Q4CY20 and -1.4% in Q1-2021), averaging -5% y-o-y in 2020 and -6.1% in FY21.

Analysts at HSBC, however, caution that the GDP releases under COVID-19 pandemic do not fully capture the state of the economy. India, HSBC said, runs an informal sector survey every five years and revises past GDP growth data accordingly and the last such survey was conducted before demonetisation.

“As such the GDP numbers since demonetisation do not capture the true state of the informal economy. This time around too, GDP releases may not fully capture the weakness in economic activity, until it is updated with a new informal sector survey a few years down the line,” wrote Pranjul Bhandari, chief India economist at HSBC in a co-authored July 23 note with Aayushi Chaudhary and Priya Mehrishi.

By arrangement with Business Standard.

RBI Acts By Cutting Rates Again, but Will this be Enough to Kickstart Lending?

The real challenge is in getting the Indian banker, who has the resources, but is risk-averse to lend on fears of getting stuck in a new NPA cycle.

The Reserve Bank of India (RBI) has fired from its arsenal again with the monetary policy committee (MPC) slashing the policy repo rate by 40 bps to 4% taking the cumulative rate reduction to 1.15% in a span of two months.

The repo rate now stands at its lowest level since its introduction. The reverse repo rate has been consequently reduced and the cumulative rate reduction is even deeper at 1.55%. The reverse repo rate at 3.35% is marginally higher (by 10 bps) than the rate seen in April 2009, in the aftermath of the global financial crisis.

The decision to prepone the scheduled MPC meeting and announcing a decision which was most likely in the first week of June shows clearly the proactive nature of India’s central banking system and its close monitoring of the developments amidst these challenging times. The decision to utilise the policy space available now than at a later date and also ensuring some headroom for more rate cuts shows that the central bank is ready to take charge now but is also aware that the ammunition will be required once revival takes place. However, whether space will really be available would require more clarity on the inflation trajectory which would be available subsequent to the opening up of the economy.

Also Read: RBI Cuts Interest Rates, Estimates 2020-21 GDP Growth to Stay in ‘Negative Territory’

The broad consensus of the committee has been to reduce rates considering that the macroeconomic impact of the pandemic has been much severe than initially anticipated coupled with acute stress in a number of sectors. The attention of the members on the objective of growth has been bolstered with the expectation of a likely contraction in the GDP estimate during the year and the continuity in the accommodative nature of the policy indicates that revival in growth will continue to get precedence for some more time.

The nationwide lockdown for two months has led to a compounded effect of supply disruptions and demand compression and coupled with the lingering uncertainties, the MPC believes that the GDP growth for FY’21 will remain in the negative territory. There have been a number of GDP estimates which have been computed from both government and private organisations. The chief economic adviser has reportedly pegged India’s GDP growth at 2%-3% in FY’21, the N.K Singh Committee believes it can be in the range of -6% to 1% in FY’21 while the IMF’s estimate has been at 1.9% in 2020. At the same time, the MPC believes that headline inflation will remain firm in the first half of FY’21 and would ease to below the 4% target in the second half of the fiscal. Directional guidance from the MPC, rather than a band estimate of growth and inflation amidst the uncertain environment seems apposite. But, the only conundrum for the markets is that with a wide range of estimates from the government organisations, which number should be relied upon?

Shaktikanta Das, the new Reserve Bank of India (RBI) Governor, attends a news conference in Mumbai, India, December 12, 2018. Photo: Reuters/Danish Siddiqui/Files

In addition, a slew of regulatory announcements have been announced with further extension of term loan moratorium and deferment of interest on working capital providing much needed relief to the borrowers while relaxation of consolidation sinking fund of the states being the most positive in terms of addressing almost 45% of the redemption pressure for the states. Additionally, extension of time limits for import remittances by 6 months and export credit sanction till 15 months will provide flexibility in managing the operating cycles at a time when both exports and imports look precariously placed.

All the announcements by the RBI today are steps in the right direction to ease the financial conditions in the economy, which is the foremost objective of monetary policy in the short run. Another objective of monetary policy is to have an impact on the real sector by supporting credit to various channels. Credit flows in the economy have remained subdued since almost a year now. The investments by banks into CPs, bonds, debentures of around Rs 66,757 crore so far this year (till May 8) highlights the efficacy of the TLTRO operations but on-lending of this is imperative.

Apart from muted credit, the transmission in the banking system has been slow. The cumulative rate cut of 2.1% during January 2019 to March 2020 saw a cumulative transmission of 60 bps in the MCLR of scheduled commercial banks (SCBs) and 1.14% in the weighted average lending rates on fresh loans. During this period of 15 months, the bank credit growth has been 10.9% almost half of the growth rate recorded during the corresponding duration a year ago. Therefore, the impact of lower than expected transmission and weak credit growth on the revival in economic activity has been subdued with GDP growth in all quarters prior to the outbreak of the pandemic deteriorating gradually. When the economy was moderately better than what it is at present, the impact of the transmission on the economy was muted. Thus, in these uncertain periods, this lagged effect of rate cut on the economy could even be prolonged.

Today’s monetary policy decision is akin to the guidance given by a fitness trainer to his client. Just like the effectiveness of exercise advice can be seen once things are implemented, the effectiveness of today’s decision will require resumption of activities and consequently demand to pick up in the economy. Thus, the cumulative action of 115 bps should be understood in the framework of a signaling device for the banking system to lend amidst lower cost of borrowings. Also, the further lowering of reverse repo rate to 3.35% continues to discourage the banks from parking the surplus funds and lend more.

If one finds it difficult to be in government and the RBI for designing economic packages in these challenging times, the even onerous challenge is that of a banker, who has the resources (surplus liquidity of almost Rs 7.5 lakh crore in the banking system) but is risk-averse to lend on fears of getting stuck in the NPA cycle in the near future

Cutting the interest rates and extending the moratorium period on loans was the relatively easier part of the decision to be taken. The tough part of lending to reinvigorate the animal spirits commences now.

Sushant Hede is an associate economist at CARE Ratings. Views expressed are personal.