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SC Notice To Centre, RBI On CREDAI Plea For Clarity On Loan Moratorium

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The Supreme Court of India today has issued notice to Centre and Reserve Bank of India on petition filed by the Confederation of Real Estate Developers’ Associations of India-HR (CREDAI-HR) over issue of whether all NBFCs are eligible for loan moratorium or whether banks have the discretion to give benefit.

The petition under Article 32 of the Constitution of India was filed by CREDAI seeking to raise issues of considerable importance relating to the working of banks and financial institutions, including Non-banking Financial Companies (NBFC’s) and Housing Finance Companies (HFC’s) in relation to their dealings with real estate companies, and arising from the unequal treatment meted out by the different regulators, and state of uncertainty created by the conduct of the RBI in relation to some of its measures taken purportedly to ease the crisis in the market created by the lockdown put in place to fight COVID-19. The respondents were the Union of India along with Reserve Bank of India.

Senior Advocate Harish Salve appeared on the behalf of petitioner Association, whereby the matter was heard by the supreme court bench comprised of Justice L. Nageshwara Rao, Justice Sanjay Kishan Kaul and Justice B.R. Gavai.

On 27 March 2020, the RBI announced the statement ondevelopmental and regulatory policies. Recognising the “stress in thefinancial conditions caused by Covid-19” the bank announcedmeasures with the policy objective of “………. Expanding liquidity inthe system’s sizably to ensure that financial markets and institutionsare able to function normally in the face of Covid relateddislocations….. Easing financial stress caused by Covid-19disruptions by relaxing repayment pressures and improving access toworking capital….”.

RBI issued a circular on March 27, 2020 in which it was instructed that in respect of all termloans banks including NBFCs and housing finance companies,described as “lending institutions” were permitted to grant amoratorium of three months on payment of all instalmentsfalling due between March 1, 2020 and March 31, 2020”.

Salve contended that there is an entitlement to Moratorium in terms of a circular of the RBI but some banks not giving benefit.

On which Solicitor General Tushar Mehta said that a similar plea was filed before the High court.

Sr Advocate Salve further said that “the real problem is what’s happening with RBI. RBI issued a circular with entitlement to a moratorium. When the matter came to court RBI said circular is binding. But some banks not giving benefit. RBI reply says it’s discretion of the banks, RBI governor speech said it’s binding. After PM and FM package it may sort itself outOur NBFCs have large loans. Banks saying, we don’t need to give you relief. The deferment of loan, we have members of our community who are in the real estate agency. We only want the RBI to clarify this, to clarify whether this is binding or not binding, whether they’ll give or not give”.

Salve seeks clarification over confusion in whether NBFCs eligible for loan moratorium, as when real estate agency who has large loans ask for rescheduling, banks don’t do that, banks says it will give or not give or will give to small and not big enterprises. 

Paragraph 8 of the RBI circular provided that “lending institutions shall frame board approved policies for providing the above-mentioned reliefs to all eligible borrowers inter-alia including the objective criteria for considering reliefs under paragraph 4 above and disclosed in public domain…”.

It was said in the petition that NBFCs understood the para 8 as a mandatory directive-in the sense that the lending institution were bound to frame a policy for granting moratorium, but the debtors were not obliged to avail of the moratorium, and it would be their choice whether or not to defer payments and increase the tenure of the lending. Some of the NBFCs/ HFC’s treated this as a discretionary matter i.e. leaving it to the lending institution to decide whether or not to make available, any concessions.

“If the NBFCs/ HFC’s do not make available moratoriums, it will lead to large-scale disruptions by their having to foreclose against the properties, which will cause a further crash in the property market and further lower property values at this difficult time. If they make available moratoriums, then they would go bankrupt for want of liquidity. In either event not only with this vitally affect them, but in the long run as well as in the medium term it would destroy the business of the Petitioners. Construction industry being one of the largest employers of labour, if destroyed, will have a cascading and a devastating effect on the economy of the nation” said in the petition.

The petitioner said that they are facing triple jeopardy i.e. they are mandated to pay the workers, not get supplies of material and there by continue with their works, yet even for the moratorium granted by Reserve Bank of India, they have to pay interest. The grant of moratorium also having been declared as discretionary in the hands of the lenders makes the existence of Petitioners even more difficult. RBI has not provided any guidelines to the lenders as to how discretion has to be exercised by them for grant of moratorium.

Therefore, the petitioners sought directions to provide such financial relief to the members of the Petitioner CREDAI, freezing all financial liabilities of such members towards banks and financial institutions or any other body corporate from whom the members of the Petitioner have taken loans, for a period of 6 months.

-India Legal Bureau

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