Can't extend loan moratorium as it may affect credit discipline: RBI to SC

 The Reserve Bank of India, in an affidavit, filed before Supreme Court in the loan moratorium case, said that it would not be possible to give more time as a relief for sectors hit by the coronavirus pandemic.

The Centre made it clear that further relief is not possible beyond waiver of interest-on-interest for certain categories of loan account having borrowing up to Rs 2 crore.

In the affidavit, RBI told Supreme Court, “Resolution Framework issued by the Reserve Bank on August 6, 2020 is aimed at facilitating revival of real sector activities and mitigating the impact on the ultimate borrowers, which are under financial stress caused by economic fallout on account of Covid-19 pandemic."

"In terms of the Resolution Framework, only those borrower accounts shall be eligible for resolution which were classified as standard, but not in default for more than 30 days with any lending institution as on March 1, 2020.”

RBI further said, "a long moratorium exceeding six months can impact the credit behaviour of borrowers and increase the risks of delinquencies post resumption of scheduled payments.

It may result in vitiating the overall credit discipline which will have a debilitating impact on the process of credit creation in the economy. It will be the small borrowers which may end up bearing the brunt of the impact as their access to formal lending channels is critically dependent on the credit culture."

Further, mere continuation of temporary moratorium would not even be in the interest of borrowers.

It may not be sufficient in addressing deeper cash flow problems of the borrowers and in fact exacerbate the repayment pressures for the borrower.

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.

On the matter of non-performing assets, RBI urged the apex court to lift the stay on classifying any account as NPA. RBI said, "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. It is further urged the SC that the interim order dated September 4, 2020, restraining classification of accounts into NPAs in terms of the directions issued by RBI be vacated with immediate effect."

The Reserve Bank also said that the decision by the government to provide additional relief to a large segment of borrowers has addressed the primary prayers of the petitioners.

The Finance Ministry had filed an additional affidavit in the apex court on October 2 saying it had decided to waive compound interest (interest on interest) charged on loans of up to Rs 2 crore for a six-month moratorium from individual borrowers as well as medium and small industries.

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.

Initially, the RBI on March 27 had issued the circular which allowed lending institutions to grant a moratorium on payment of instalments of term loans falling due between March 1, 2020, and May 31,2020, due to the pandemic.

Later, the period of the moratorium was extended till August 31 this year.

Discoms obligated to pay for electricity within 45 days: Power Ministry

With its relief being construed as a moratorium on payments, the Union Power Ministry has clarified that electricity distribution companies will continue to be obligated to pay for power within 45 days of presentation of the bill.

It, however, lowered late payment charges for the period between March 24 and June 30.

In a letter addressed to heads of power/energy departments of all states, the Union Power Ministry on Monday said there has been some "misconception" regarding its last month order that had relaxed norms for a payment security mechanism.

"It is made clear theobligation to pay for the power within 45 days of the presentation of the bill (or the period given in the power purchase agreement) remains the same," it said.

As per the relief granted last month, the distribution companies will need to either deposit or give Letter of Credit (LoC) for 50 per cent of the cost of power they want to buy. The remaining will have to be paid within the period given in the PPA, failing which the delayed payment surcharge will apply, it said.

Since August last year, energy distribution companies, or discoms, are required to set up a payment security mechanism like a letter of credit from a financial institution, for buying electricity from a generator. In case of a default, this LoC is encashed.

On March 28, the Union Government approved a financial relief package for the power sector that provided for easing of payment security mechanism for three months and reduced payment security amount by half for future power purchases.

This was done to help discoms battling non-payment in nationwide lockdown.

In the letter on Monday, the ministry said late payment surcharge is applicable in case of nonpayment of dues within the stipulated period. This surcharge in most cases goes up to 18 per cent per year.

"Keeping in mind the present situation, the Government of India have vide letter dated March 28, 2020 advised the Central Electricity Regulatory Commission (CERC) to reduce the rates of late payment surcharge applicable for the period March 24, 2020, to June 30, 2020," it said.

From July 1, the delayed payment surcharge shall apply at the rate given in the power purchase agreement (PPA).

"The obligation to pay for power within 45 days of the presentation of the bill or as provided in the PPA remains unchanged," it said. "Obligation to pay for capacity charges as per the PPA shall continue, as does the obligation to pay for transmission charges."

The letter went on to state that efforts are also being made to infuse some liquidity in the power sector, the details of which would be shared with Discoms shortly.

"However, Discoms may also raise funds, if required, to meet this crisis," it added.