What is Moratorium?
A moratorium is a temporary suspension of an activity or law until future consideration warrants lifting the suspension, such as if and when the issues that led to moratorium has been resolved. It may be imposed by a government, a regulator or by a business. Moratoriums are generally imposed when there are temporary financial hardships. For example, a business that has exceeded its budget might place a moratorium on new hiring until the start of its next fiscal year. On the other hand, when it comes to legal proceedings, a moratorium is imposed on an activity such as a debt collection process during bankruptcy proceedings.
A moratorium is a temporary halt of business or a suspension of some law or regulation. Most of the time, moratoriums are intended to alleviate short term financial hardship or provide time to resolve related issues. For example, in the immediate aftermath of a natural disaster like an earthquake or flood, an emergency moratorium may be granted by the government on some financial activities. It will subsequently be lifted when normal business can commence again. If a company is experiencing financial difficulties, it can place a moratorium on certain activities to lower costs. Moratoriums of this nature, designed solely to reduce unnecessary spending, are not meant to interrupt a business’s ability or intent to repay its debts or to meet all necessary operational costs. According to the Bankruptcy law, a moratorium is a legally mandated hiatus in debt collection from the creditors. This time-out period protects the debtor while a plan for recovery is agreed upon and put in place. This type of moratorium is typical in Chapter 13 bankruptcy filings in which the debtor seeks to restructure payments of outstanding debts.
The Moratorium Case
The Reserve Bank of India (RBI) informed the Supreme Court that the moratorium on repayment of loans must be extendable to two years under certain conditions. Also, the sectors most distressed by the economic slowdown are being identified.
“We are in the process of identifying the distressed sectors as per impact of the hit they have taken,” Solicitor General Tushar Mehta told the three-judge Bench, which was headed by Justice Ashok Bhushan.
The apex court then said that it would hear the matter again and decide about the same on the next day a bunch of petitions demanding waiver of interest, or waiver of interest on the suspended monthly installments during the moratorium period. The bench was hearing a plea which was challenging levy of interest on loans during the moratorium. This plea was filed by an Agra resident Gajendra Sharma which sought a direction to declare the portion of RBI’s March 27 notification as something beyond the bank’s legal power. Being the borrower, the interest on loan amount charged during the moratorium period leads to creating hardship to the petitioner (borrower). It violates the Article 21 of the Constitution of India, by creating hindrance and obstruction in Right to Life. In June the Supreme Court had observed that the question is not of waiver of complete interest for the entire period but it is limited only to the interest charged on interest by banks. It had also observed that the charging of interest by banks during the six month moratorium period on term loans was ‘detrimental’. On its part, the RBI had submitted that a waiver of interest of loans will impact the financial viability of the country’s financial sector. The RBI also said that banks could for go about Rs 2 trillion in interest income if interests are waived off for the six month moratorium.
The Solicitor General suggested a meeting of representatives of the finance ministry with RBI and banks to find a solution for the same. He also sought to get more time on behalf of the Centre and requested the Bench to examine the affidavit which was submitted by the government. However, the Bench said the final hearing will be on 2nd of September 2020 i.,e Wednesday. The circular issued by the RBI on personal loan reconstructing says that the resolution plans may include rescheduling of payments or granting of moratorium, based on an assessment of income streams of the borrower, subject to a maximum of two years.
“Correspondingly, the overall tenor of the loan may also get modified commensurately. The moratorium period, if granted, shall come into force immediately upon implementation of the resolution plan,” it said.
The Supreme Court ordered an interim extension of loan moratorium till September 28th, 2020, directing banks not to tag any loans as non-performing till future directions. The apex court adjourned the case for the last time, granting the Reserve Bank of India, Centre and banks two weeks to work together and file a concrete reply on their stand on waiving of interest charged during the period of moratorium. The Justices who passed the interim order were the head of the bench was Justices Ashok Bhushan, and the bench comprising of R Subhash Reddy and M R Shah while hearing a batch of petitions seeking waiver of interest, or waiver of the interest on interest suspended EMIs during the extended period amid the nationwide lockdown due to the Covid-19 pandemic. The apex court i.e., the Supreme Court will continue hearing the case on September 28th, 2020. The three judge bench noted that the government at the highest level was considering all the issues in this batch of plea related to loan moratorium. Within a period of two weeks the government shall file a concrete response holistically considering all the sectors.
The order also noted that an expert committee had been constituted to look into all the issues and then an action will be taken by the government. The court took on record the concerns which were raised by senior advocate Harish Salve for Indian Banking Association (NBA) with respect to individual borrowers apart from other sectors that individuals shall be adversely affected and decisions need to be taken through finance ministry and not just the Reserve Bank of India. Senior advocate Kapil Sibal, representing Real Estates Associations, argued that the “downgrading of borrowers is still continuing. Borrowers must be protected against such downgrading.”
Mehta and Salve opposed the plea for downgrading and sought two weeks time to cater to this issue. While requesting the bench Salve said, “Please don’t pass any orders on downgrading today because this is based on many factors. Companies will suffer”.
Then the bench said in its order, “We are inclined to grant two weeks to file appropriate affidavit. We make it clear that we shall consider different prayers made by petitioners on the next date. All decisions taken by the RBI, GOI or the banks should be placed before the Court for consideration”. On 22nd May, the central bank had extended the term on moratorium loans till 31st August amid the nationwide lockdown. In March, the central bank had allowed a three month moratorium from paying EMIs and other loans on payment of all term loans due to between 1st March and 31st May.
This article has been written by Oorvi Agarwal, 4th year, BA-LLB student of Symbiosis Law School, Hyderabad.