Moratorium – To Give Or Not To Give?


Our previous articles have highlighted the various regulatory measures that have been introduced from time to time by the regulators and government bodies. In particular, the Reserve Bank of India (“RBI“) had introduced certain measures on 27th March 2020 (“Covid Regulatory Package“) which allowed financial institutions to permit moratorium in line with the said package.

The Covid Regulatory Package was interpreted by the Delhi High Court in the matter of Anant Raj Limited vs Yes Bank Limited and was also discussed in our previous article on the subject. Thereafter, the Bombay High Court has considered the issues in the matter of Transcon Inconia Pvt. Ltd. & Ors. v. ICICI Bank & Ors vide its order dated 11th April 2020 (“said Order“) in the matter.


Transcon had taken finance facilities from ICICI Bank (“ICICI“) and failed to service the debt instalments due as on 15th January 2020 and subsequently 15th February 2020. Accordingly, the account was classified as SMA-2.

As per the prevailing RBI norms, the account was liable to be declared as a Non-Performing Asset (“NPA“) on 15th March 2020 if Transcon failed to make due payment.


The principal question which therefore arose before the Hon’ble Bombay High Court was whether the moratorium period announced under the Covid Regulatory Package was required to be excluded in computation of the 90-day default period for classification as non-performing asset (“NPA“), in respect of the amounts that first fell due prior to 1st March 2020 and remain unpaid till date.


The Hon’ble Bombay High Court vide its order dated 11th April 2020 (“Bombay HC Order“) has held that that the period of 1st March 2020 till 31st May 2020 during which there is a lockdown will stand excluded from the 90-day NPA declaration computation until the lockdown is lifted. The Bombay HC Order records that irrespective of the continuance of the moratorium until 31st May 2020, if the lockdown is lifted at an earlier date than 31st May 2020, then this protection available to Transcon will cease on the date of lifting of the lockdown, and the computing and reckoning of the remainder of the 90-day period will start from that earlier lifting of the lockdown-ending date. As a corollary thereof, if the lockdown extends beyond 31st May 2020, then these days will be deferred accordingly, irrespective of whether the moratorium itself is extended or not.

The Bombay HC Order further clarified that the moratorium is linked to complete revocation of the lockdown because otherwise it will be difficult for any court to decide whether or not a partial or staggered lifting of the lockdown (as is currently the case) enables the borrowers to resume their normal operations and, if so, to what extent.


In a similar case in Shakuntala Educational & Welfare Society vs. Punjab & Sind Bank the Hon’ble Delhi Court has decided the same issue vide its order dated 13th April 2020 (“Delhi HC Order“). In the said case, Shakuntala Society highlighted that its various educations institutes which were situated in Uttar Pradesh were prohibited from coercing the students to pay the due fees on account of the specific directive issued by the State Government which this rendered it unable to repay its loan instalments.

The Hon’ble Delhi High Court in this case relied on the order dated 6th April 2020 passed in Anant Raj Limited vs Yes Bank Limited and reiterated that the intention of the RBI while issuing the regulatory package was to maintain status quo with regard to the classification of accounts of the borrowers as they existed on 1st March 2020 and therefore decided that the loan account of the petitioners shall not be classified as NPA. Further, the Delhi HC Order clarified that in case, the aforementioned directive issued by Uttar Pradesh is withdrawn, the said institution would in such a case be liable to forthwith pay the instalments within one week from the date of the said withdrawal.


On 17th April 2020, the RBI in its press conference announced certain extra reliefs and provided clarity on few existing ones in view of the on-going Corona crisis (“RBI Circular 2“). The RBI Circular 2 has been issued along with the report of the Basel Committee on Banking Supervision (“BCBS“). In line with the clarification provided by the BCBS, RBI Circular 2 has clarified that in respect of all accounts classified as standard as on February 29, 2020, even if overdue, the moratorium period, wherever granted, shall be excluded by the lending institutions from the number of days past-due for the purpose of asset classification under the Income Recognition and Asset Classification norms. Similarly, in respect of working capital facilities sanctioned in the form of cash credit/overdraft (“CC/OD”), the Covid 19 Regulatory Package permitted the recovery of interest applied during the period from March 1, 2020 upto May 31, 2020 to be deferred (“deferment period“). The RBI Circular 2 has now further clarified that such deferment period maybe granted in respect of all facilities classified as standard, including SMA as on February 29, 2020. The RBI Circular 2 has further clarified that such deferment period shall be excluded for the determination of out of order status. In an aim to strike a balance between protecting the interest of the borrowers as also endeavouring to protect financial markets from suffering severe shocking from lack of adequate provisioning, the RBI Circular 2 has also announced that in order to maintain sufficient buffer and remain adequately provisioned to meet future challenges, banks will have to maintain a higher provision of 10% on all such accounts which are under standstill.


It is therefore clear that the judiciary and RBI are indeed on the same page as regards the moratorium and its applicability. The Bombay HC Order and the Delhi HC Order have aimed to look at the spirit of the law and have recognised that the extent of the present inability to repay has to be viewed in light of the extra ordinary circumstances. In cases where the borrowers have been able to satisfy the courts of their inability to duly repay arising out of the special circumstances existing today, the RBI Regulatory Package was suitably interpreted even in the absence of the RBI Circular 2 or the report by BCBS.

It is true that the borrowers will be in distress in these unprecedented times but at the same time it is critical that the lenders don’t singularly have to bear the brunt of it all. This is not to say that the wilful and repeated defaulters will get undue benefit of the RBI’s moratorium. The undeserving and non-performing borrowers must not be entitled to apply for any further extensions/relaxations in any scenario whatsoever. Each case has to be decided on its respective facts and circumstances. The judiciary will have to take into account the predicament of the lending institutions who have to strike a balance between being a benevolent lender and enforcing security to minimise bad loans on their balance sheets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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