Interpreting Reserve Bank of India’s March 27 circular on moratorium on payment of loan instalments, the Karnataka High Court has held that though the circular grants discretionary power to banks to grant moratorium it is mandatory for the banks to ensure the continuity of viable businesses so that the non-grant of a moratorium does not result in adversely affecting the survival and continuity of a viable business.
“All borrowers are eligible to seek a moratorium. If a borrower were to seek it on the ground that continuity of its business would be affected and establish the same, the borrower would as a matter of right be entitled for the moratorium so that such continuity is not adversely affected,” the court said.
Justice Suraj Govindaraj delivered the judgment on July 8 while allowing a petition filed by Velankani Information Systems Ltd. (VISL), which owns and manages Velankani Technology Park and The Oterra,a five-star hotel, both situated in Electronics City, Bengaluru.
Further, the court said that when multiple banks are involved in a loan transaction, one bank cannot deny extension of moratorium facility, when another or other banks are willing to do so.
The court also said that the provision of moratorium is applicable to all loans/advances and facilities extended by a lending institution, including the structured loans such as Lease Rental Discounting (LRD), and not applicable only to the term loans and working capital facilities.
Also, the court directed the RBI to monitor the implementation of the March 27 circular on moratorium, including verification of whether there are approved policies on moratorium by the respective boards of lending institutions, and to set up an effective grievance redressal forum for aggrieved borrowers to complain on improper or non-implementation of the circular.
“The circular has been issued to protect and preserve the economy of the country on account of the COVID-19 pandemic. The issuance of the circular is in public interest, interest of the economy and the country. The enforcement thereof would also come within the purview of enforcing a public duty,” the court said while declining to accept the RBI’s contention that issues raised in the petitions is a dispute between the banks and the borrower.
The court directed the RBI to ask all the banks to submit the board-approved policy for approval to the RBI, to approve such policy, and verify if it contains the objective criteria.
Case background
The HDFC Bank, along with Federal Bank Ltd. and Aditya Birla Housing Finance Ltd., had granted ₹475 crore advance in the form of LRD to VISL.
The company had questioned the decision of HDFC Bank in rejecting its multiple pleas for grant of moratorium as per RBI’s circular even though company had all eligibility to claim moratorium facility as its loan account was a standard one without any default.
The HDFC claimed that VISL cannot be given moratorium as lease rentals from Tech Park are regularly credited to the escrow account and that the moratorium cannot be extended to the LRD facility.
Though Federal Bank and Aditya Birla Finance initially declined moratorium, they later agreed subject to HDFC Bank agreeing to offer moratorium.
Meanwhile, Aditya Birla Finance in April cautioned VISL that the loan account with it was likely to become a NPA as HDFC and Federal Bank were not sharing the EMI amount with the former, forcing VISL to knock on the doors of the court.
While allowing the petition, the court directed the three banks to grant moratorium on all payments due by VISL subject to the company making payment of interest at the contracted period for the period of the moratorium and with a condition that the loan account is not, in any manner, reduced.
The court also directed HDFC and Federal Bank to reserve the EMI recovered for the months of March and April and allow the company to utilise the amounts for its day-to-day activities by maintaining proper accounts.
