The Supreme Court on Tuesday orally said it would not pass any order that will risk the economy going “haywire” after the Union government revealed that a blanket waiver of interest on debts incurred by all classes and categories of borrowers for the moratorium period would mean forgoing an estimated over ₹6 lakh crore.
“If the banks were to bear this burden, it would necessarily wipe out a substantial and a major part of their net worth, rendering most of the banks unviable and raising a very serious question mark over their very survival”, Solicitor General Tushar Mehta submitted before a Bench led by Justice Ashok Bhushan.
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Reserve Bank of India (RBI) counsel, senior advocate V. Giri, said the discretion to frame a resolution plan should be with the bank and not the borrower.
The Supreme Court is hearing the government’s response to separate pleas made by industry, real estate and power sectors, among others, for debt relief, including waiver of interest, for the six-month loan moratorium period, to help them get back on their feet amid the pandemic.
Possible crippling of banking sector
Mr. Mehta said a possible crippling of the banking sector was one of the main reasons for “not even contemplating waiver interest” and restricting relief to “deferment of payment of instalments”.
He explained that for every loan account there were about 8.5 deposit accounts in the Indian banking system.
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“As mentioned on oath by the Indian Banks Association, the State Bank of India has stated that interest amount from borrowers during six months moratorium works out to be ₹88,078 crore [approx.], whereas the interest payable to the depositors during the said period works out to be ₹75,157 crore [approx.]”, he submitted.
It was necessary for the Centre to “rationalise any kind of financial relief”. The government cannot do anything which would topple the overall economic scenario. “There is a need to conserve and rationally use financial resources to deal with the economic effects pandemic over an uncertain and indeterminate time frame”, Mr. Mehta submitted.
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The health sector required huge expenditure and it was necessary to ensure that the common man got his livelihood at the earliest.
It was the ministries concerned, and not the National Disaster Management Authority (NDMA) that took care of the economic impact during a pandemic which affected the entire nation. The ministry involved in this case was the Ministry of Finance and the Reserve Bank of India (RBI), which deal with the crisis. The Prime Minister, with the aid of the Cabinet, directly supervised the ministries’ decisions.
Proactive actions by RBI, ministry
“The Ministry of Finance, under the Disaster Management Act, and the RBI have acted proactively. The overriding objective was to prevent financial markets from freezing up; ensure normal functioning of financial intermediaries; ease the stress faced by households and businesses; and keep the life blood of finance flowing”, Mr. Mehta stated.
The government had sanctioned over ₹90,800-crore liquidity injection for the power distribution companies. This would enable them to pay their outstanding dues to power producers and transmission companies.
In the real estate sector, the Centre said a government advisory was issued allowing the extension of registration and completion dates of projects under Real Estate Regulatory Authorities by treating COVID-19 as an event of force-majeure.
Mr. Mehta said the government spelt relief for Micro, Small and Medium Enterprises (MSME) sector by launching, among other things, an emergency credit line of up to ₹3 lakh crore, backed by 100% government guarantee to enable the MSMEs to get back to regular operations. A sum of ₹1.87 lakh crore had been sanctioned.
Downgrading of loan accounts
The resolution framework announced by the RBI took care of the apprehensions raised about the possible downgrading of loan accounts from Standard to Non-Performing Asset (NPA) and consequent impact on ratings.
“The Resolution framework provides that loan accounts which slip into NPA between invocation and implementation may be upgraded as Standard on the date of implementation itself”, Mr. Mehta said.
The Security and Exchange Board of India had issued circulars to relax the “recognition” of defaults committed during moratorium. This took care of the fears raised about credit rating agencies recording a downgrade to NPA for defaults during the moratorium period.
“The Kamath Committee set up by the RBI has recommended financial parameters for debt restructuring of 26 sectors affected by COVID-19. For corporate accounts [other than MSMEs with up to ₹25 crore exposure] which were up to 30 days overdue as on March 1, 2020, the framework of August 6, 2020 provides lenders and borrowers various ways of ensuring viability. At the same time, the prudential framework of June 2019 continues to be available for cases not covered under the August 6 framework”, Mr. Mehta noted.
The court will continue hearing the case on December 9.
