Are Shadow Banks Eligible For Loan Moratorium? Top Court Asks Centre, RBI

The Supreme Court issued a notice to the government and the Reserve Bank of India on Friday, asking whether all non-banking financial companies (NBFCs) - also known as shadow banks - are eligible for the loan moratorium announced by the central bank. The real estate developers' apex body Confederation of Real Estate Developers' Associations of India (CREDAI), in an April plea, argued that the RBI's circular on the moratorium is an "eyewash as it provides that the interest shall be chargeable during the moratorium period and it makes no sense in paying additional interest along with the regular EMIs". A bench comprising Justices L Nageswara Rao, S K Kaul and B R Gavai sought response of the Reserve Bank of India and others on CREDAI's plea for greater clarity on the matter.

NBFCs have, traditionally, been the key lenders to the real estate sector in India. CREDAI, which is the top body of private real estate developers, had moved the top court over confusion whether NBFCs are eligible for the loan moratorium announced by the central bank. It had sought clarification from the Centre and the RBI whether any interest will be charged from the borrower for the moratorium period by any bank or financial institution.

In March, the RBI had allowed banks and finance companies to offer their borrowers a moratorium on loans for three months to tide over the financial fallout from the coronavirus pandemic. Most NBFCs have not been able to reap this benefit as the final decision on which borrowers can delay loan repayments rests with banks. But they have extended debt moratoriums to their borrowers who mainly fall in the self-employed category and have seen their businesses affected by the lockdown.

In its circular dated March 27 on the loan moratorium, the RBI had given liberty to all banks and financial institution to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, subject to the borrower making such a request. It had also said that repayment schedule for such loans as also the residual tenor would be shifted across the board by three months after the moratorium period.

However, interest would continue to accrue on the outstanding portion of the term loans during the moratorium period, according to the RBI circular.

"The real problem is what's happening with RBI. The RBI issued a circular that gave entitlement to a moratorium. When the matter came to the court, the RBI said circular is binding. But some banks are not giving benefit," Harish Salve, representing CREDAI, told the court.

The RBI's reply was that it's up to the banks, while the RBI Governor's speech indicated that it is binding, he said. "Our NBFCs have large loans. Banks saying we don't need to give you relief," Mr Salve added.

Solicitor General, Tushar Mehta, told the Supreme Court that he will take instructions from the RBI and Finance Ministry and market regulator Sebi on the matter.

The matter will be taken up for hearing in the court after two weeks.