Further extension of loan moratorium will vitiate credit discipline: RBI

New Delhi: 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 told the Supreme Court on Saturday.

In its 17-page “consolidated affidavit” filed ahead of the hearing on Tuesday of the loan moratorium case, the RBI stated that extension of the moratorium beyond the six-month period that expired on August 31 will impact credit behaviour of borrowers and increase the risks of delinquencies. The  moratorium, the RBI stated, “would not even be in the interest of borrowers” as it does not address “deeper cash flow problems” of borrowers, but, in fact, “exacerbates the repayment pressures”.  

The RBI submitted that any waiver of interest on interest would also 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.

Thus, 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 banking regulator filed the affidavit in pursuance to the apex court's October 5 order asking the Centre and the RBI to place on record the K.V. Kamath committee recommendations on debt restructuring because of Covid-19 related stress on various sectors as well as the notifications and circulars issued so far on loan moratorium.

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.

The top court is hearing a batch of pleas, including the one which has sought a direction to declare the portion of an RBI notification, issued on March 27, "ultra vires to the extent it charges interest on the loan amount during the moratorium period..."

The RBI in its affidavit also urged the Supreme Court to vacate its September 4 interim order restraining banks from declaring any new non-performing accounts (NPAs) and said its August 6 resolution framework is only for those borrowers who were not in default for more than 30 days as on March 1, 2020, leaving out standard and NPA accounts.

 "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 Central bank said.