Set aside order on NPA classification freeze: RBI to Supreme Court

The Reserve Bank of India (RBI) has asked the Supreme Court to set aside its order on declaring accounts as non-performing assets temporarily as it will undermine its regulatory powers, while submitting that the regulator cannot address structural problems of the real estate sector that has sought additional relief.

The central bank also told the apex court that primary concern of the petitioners, who have asked for relief on payment of interest during the six-month moratorium period (from March-August), have been addressed through the Central government’s proposal to foot the compound interest sum of small borrowers.

“It is humbly submitted that this court had given an across the board stay on classification of any account as NPA (non-performing asset) 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 RBI,” an affidavit submitted by the RBI on Friday stated.

The RBI informed the court that the regulator had been “most proactive” in accounting a series of measures to mitigate the impact of the Covid-19, stressing that it has led to liquidity to the tune of Rs 11.1 trillion or 5.5 per cent of the gross domestic product, along with ensuring lower borrowing costs which resulted in issuance of corporate bonds worth Rs 3.2 trillion in the first half of this fiscal year.

While rejecting any further relief measures from petitioners, belonging to various industries, the RBI said it took “a balanced view, taking into account the interest of the depositors, borrowers, real sector entities and banks”, along with keeping in mind “financial stability and economic growth of the country.”

The regulator was of the view that any waiver of interest on interest, or compounding, will lead to “significant economic costs which cannot be absorbed by the banks without serious dent of their financials” and the government’s decision to bear the compounding interest cost for all loans up to Rs 2 crore “has addressed the primary prayers of the petitioners.”

It defended its move to provide leeway to banks to use its discretion on the eligibility of customers for loan repayment moratorium, along with other related terms, saying they were best placed to take a decision in the manner owing to different customer profile and business models of each banks.

The RBI was not in favour of extending the moratorium, imposed in March 2020, beyond August 2020 as it was not in the interest of borrowers, too. “It may not be sufficient in addressing deeper cash flow problems of the borrowers and in fact exacerbate the repayment pressures for the borrowers. Therefore, a more durable solution was needed to rebalance the debt burden of viable borrowers, both businesses as well as individuals, relative to their cash flow generation abilities,” the RBI said.

On the plea of sectors such as real estate, which have submitted to the court that enough measures have not been taken to safeguard their interest during the pandemic, the RBI said that some sectors including real estate and power were already stressed even before the outbreak of Covid-19 due to specific problems.

“Real estate sector has undergone structural changes in the recent past and is also facing a demand problem as evident from the high levels of unsold inventories and stalled projects…Nonetheless, it is submitted that the travails of real sector cannot be solved through banking regulations. The banking regulations of RBI cannot substitute addressing of structural problems of the real sector,” the affidavit read.

The RBI prayed to the court to not consider relief sought by petitioners in the light of its submission.

The Supreme Court had earlier this week asked the Centre and the Reserve Bank of India to place on record the KV Kamath committee recommendations on Covid-19-related debt restructuring, along with asking them to consider the relief sought by the real estate and power sectors.

The SC is hearing a petition filed by an Agra resident Gajendra Sharma that demanded a waiver of interest charged by banks on the instalments that have been deferred for repayment by the Reserve Bank of India (RBI) through a six-month moratorium imposed in March. A number of industrial bodies have joined the cause with the original petition demanding waiver of interest, or waiver of interest on interest on the suspended monthly instalments during moratorium period.

The Central government submitted an affidavit in the SC last week that it is ready to bear the burden of waiving compound interest for small borrowers. Any individual or entity whose loan amount is less than Rs 2 crore, irrespective of whether they have availed loan repayment moratorium or not, will be eligible for waiver of the compounding of interest, it said. This includes micro small and medium enterprises, education, housing, consumer durable, credit card, automobile, personal, and consumption loans.