New Delhi: The Centre has told the Supreme Court that going any further than the fiscal policy decisions already taken, such as waiver of compound interest charged on loans of up to Rs 2 crore for six months moratorium period, may be “detrimental” to the overall economic scenario, the national economy and banks may not take “inevitable financial constraints”.
The Union Finance Ministry, through its additional secretary Pankaj Jain, filed the affidavit in compliance of the top court’s October 5 order asking it to place on record the K V Kamath Committee recommendations on debt restructuring in view of Covid-19 related stress on various sectors as well as the notifications and circulars issued so far on the loan moratorium and financial difficulties.
Prior to this, the Centre had told the top court that it has decided to waive compound interest (interest on interest) charged on loans of up to Rs 2 crores for a six-month moratorium period announced due to the pandemic from individual borrowers in eight categories – MSME, Education loan, Housing Loan, consumer durable loan, credit card dues, auto loan, personal loans to professionals and consumption loans.
The court, on October 5, had observed that the Centre’s affidavit did not contain necessary details and had asked the Centre and the RBI to file fresh ones in the case. In the fresh affidavit, the Centre referred to its various fiscal policy decisions and the Reserve Bank of India and expressed inability in expanding the scope of reliefs already provided to different sectors.
“It is… submitted that while taking… decision and to supplement the earlier fiscal policy decisions under the ‘Garib Kalyan’ and ‘Aatma Nirbhar’ packages entailing substantial financial burden, the respondent government has rationalised the fiscal impact of the same, and that going any further than what has been decided and submitted to the hon’ble court may be detrimental to the overall economic scenario, and the national economy or the banking sector may not be able to take the inevitable financial constraints resulting therefrom.”
The official said the Centre’s decision with regard to the question of waiver of interest on interest to bear the burden of compounding of interest in respect of certain categories of loans was taken in the larger public interest only in the specific context of the pandemic, which is, by itself, an unprecedented situation.
Such fiscal policy decisions are taken after an elaborate exercise of gathering of facts, careful assessment of these facts and considering various alternatives, keeping in mind the economic impact on financial strength of stakeholders and all other relevant factors, more particularly during the pandemic when the global fiscal scenario is equally bad and the fact that it is uncertain as to till what date the present global and national economic stress will continue, the affidavit said.
The Centre said that the recommendations of the Kamath Committee have been broadly accepted by the RBI and the panel found “variable impact of the pandemic across several sectors, with varying degrees of severity and varying nature of problems”. “A perusal of the entire report would show that it is neither possible nor desirable to arrive at any one particular formula, whether sector-specific or otherwise, to deal with the stress situation arising from the unprecedented pandemic,” it said.
The Kamath panel had made recommendations for 26 sectors that could be factored by lending institutions while finalising loan resolution plans and had said that banks could adopt a graded approach based on the severity of the coronavirus pandemic on a sector. It said that the government extended relief through the “Garib Kalyan package of Rs 1.70 lakh crore and the Aatma Nirbhar package.. of Rs. 20 lakh crore” and various measures have also been taken by RBI to mitigate the adverse financial impact.
It said relief such as “extension of moratorium, applicability of the resolution framework, fixation of interest rate, transmission of rate cuts, delinking of interest rate from credit rating of the borrower and moratorium on repayment of non-credit instruments” have been sought in the petitions.
“This, in turn, requires expertise, technical knowledge of financing, and experience in dealing with the subject. Therefore, eligibility of proposals, benchmarks for viability, assessment of reasonableness of assumptions and, finally, acceptance and monitoring of resolution plans are matters best dealt with between the borrower and lending institutions concerned,” it said and urged the court not entertain such pleas.
“I state that the lending institutions will be required to take suitable steps for implementing the decision of waiver of interest on interest [compounded interest] in the respective accounts of the eligible borrowers within one month from the aforesaid office memorandum subsequent to which the lending institution will approached the Central Government for reimbursement,” it said.
Vacate stay on accounts’ classification as NPAs, urges RBI
The Reserve Bank of India has urged the Supreme Court to lift the across-the-board stay on classification of non-performing asset (NPA) till further orders as it has huge implications for the banking system. In a fresh affidavit filed in the apex court, the RBI said, “It is humbly submitted that this hon’able court had given an across-the-board stay on classification of any account as NPA 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 Reserve Bank of India.”
On September 3, in a respite to stressed borrowers, the Supreme Court had directed that accounts not declared NPAs as of August 31 should not be classified as such until further orders. On October 3, in an affidavit, the Centre had informed the court that any account becoming non-performing even due to the bank’s or any other delay need not suffer from being labelled as NPA.
Justifying the lifting of the stay on NPAs, the RBI cited its July 2015 circular aimed at reflecting the true and fair position of the accounts of banks so that the financial assets (which are public assets) will be accurately reflected in the books of accounts of the lenders. “The classification of a loan account as NPA, based on the record of recovery, actually enables the lenders to follow the regulatory guidelines with regard to income recognition and provisioning. Every regulatory forbearance has its trade-offs in terms of adverse incentives and unintended consequences”, said the RBI in the affidavit.
“It is further prayed that the interim order dated September 4, 2020 restraining classification of accounts into Non-Performing Accounts in terms of the directions issued by the RBI may kindly be vacated with immediate effect,” said the RBI.
On the aspect of sector-specific relief instead of a monolithic resolution framework sought by reals estate and power sectors, the RBI said such prayers deliberately obfuscate the fact that resolution framework gives complete discretion to the lending institutions and borrowers to arrive at resolution plans tailored to the specific requirements of sector subject. The RBI cited its September 7, circular, which provides for separate thresholds for 26 sectors, including power, real estate and construction. In respect of those sectors where the sector-specific thresholds have not been specified, lending institutions have been permitted to make their own internal assessments.
The RBI said that sectors such as power and real estate were already stressed even before the coronavirus pandemic on account of various factors pertaining to sector-specific problems. “Nonetheless, it is submitted that the travails of the realty sector cannot be solved through banking regulations. The banking regulations of the RBI cannot substitute the redressal of structural problems of the real estate sector,” the affidavit read.
Bank credit offtake remained poor in Apr-Sep: RBI report
Although the banks remain flush with liquidity and interest rates lowered significantly, credit offtake from banks was very low and “anaemic” during the first half of the current financial year (2020-21). The low credit offtake can be attributed to the weak demand and persistent uncertainty amid the pandemic. “During H1 2020-21, bank credit offtake was anaemic, reflecting weak demand and uncertainty in the wake of the pandemic,” showed the Monetary Policy Report for the October 2020 released by the Reserve Bank of India (RBI).
It showed that non-food credit growth (YoY) was 5.1 per cent as of September 25, 2020, lower than 8.6 per cent a year ago, driven by weak momentum and base effects. It noted that the slowdown in credit growth was spread across all bank groups, especially foreign banks. Credit growth of the public sector banks remained modest, although with some uptick since March 2020.
“Of the incremental credit extended by the scheduled commercial banks (SCBs) on a year-on-year basis (September 27, 2019 to September 25, 2020), 62.3 per cent was provided by the public sector banks and 41.2 per cent by the private sector banks, while the share of the foreign banks turned negative,” said the report. The deceleration in non-food credit growth was broad-based, with credit offtake slowing down in all the major sectors.
Though personal loans and credit to agriculture registered some improvement in July 2020, the momentum could not be sustained in August. Credit growth to services and industrial sectors has also tapered off after showing some promise in the Q1 of FY21. Personal loans accounted for the largest share of total credit flow in August 2020, followed by services. While the share of personal loans, services and agriculture increased in August 2020 vis-a-vis the previous year, the share of industry contracted.