Background
The Reserve Bank of India (RBI), on March 27, 2020[1] permitted all commercial banks, co-operative banks, All-India Financial Institutions and NBFCs to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, 2020 in order to support businesses and corporate during the liquidity crisis faced by them due to imposition of the lockdown. Further on May 22, 2020, the relaxation was further extended for 3 months by the RBI.

The March 27, 2020 notification clearly confers a permission and not an obligation to grant a moratorium. The notification required the lending institutions, who decide to grant moratorium, to put in place, a policy approved by their boards, in order to specify its procedure, methodologies and norms for providing moratorium.

However, an order made by Karnataka High Court on 8th July 2020 in a writ petition filled by Velankani Information Systems Limited[2] (the Borrower) the court stated that all borrowers will be eligible for a moratorium if they are able to establish that rejection would affect their business continuity.

In this article we have critically examined the above order.

Facts of the Case
The Borrower is involved in business of Hotel Management and Property Development. It has leased an IT park, from where it earns lease rentals. It had availed term loan facilities amounting to 475 crores from HDFC Bank, Federal Bank and Aditya Birla Housing Finance .The facilities were secured by a parri-passu charge over securities, including cashflows, receivables and rentals of the Borrower.

The facility was structured in a manner that, the lease rentals from the IT park were deposited an escrow account from where it could be withdrawn by HDFC bank and Federal Bank for their installments and remaining amount to be utilized by the Borrower for its working capital needs. The proceeds from hotel business were deposited in a separate escrow account to be withdrawn by Aditya Birla Housing Finance.

The announcement of lockdown in India adversely affected the business of hospitality sector. However the receipt of lease rentals by the Borrower were unaffected. The Borrower applied several times to the lenders for the moratorium and was rejected by the lenders on various grounds, one of which was that the business of borrower is unaffected and hence, it is ineligible for the benefit as per their policy on moratorium.

The Borrower aggrieved by the decision approached the High court of Karnataka with a plea to enforce the notification by RBI in “letter and in spirit”.

Applicability of Moratorium on Structured Loans

The loan provided in this case is in the nature of Lease Receivables Discounting (LRD). HDFC Bank in its defense contented that LRD is not in the nature of a term loan or a working capital loan and hence, the notification by RBI is altogether not applicable in the given case. The contention was opposed on the premise that the facility was used to finance the business of the borrower and had direct impact on its functioning.

The court, on the grounds that there is no such distinction in the policies on moratorium of the lenders as well as the notification and considering the fact that the loan facilities are for business purposes and have direct bearing on the functioning of the borrower’s economic activities, held that the notification shall be applicable to the LRD facility as well.
Notably, term loans are those facilities which have a pre-specified term. The mere fact that the loan facility was backed by lease receivables, should not be construed as the facility not having a fixed term. In this backdrop, our view is that the LRD, in this case, is a term loan only and hence, eligible facility for moratorium.

Impact of Refusal by one of the lenders in case of Consortium Finance

The Federal bank and Aditya Birla housing Finance, in the later stages of the case, agreed to provide the moratorium subject to fact that the other lenders agree for the same. However, HDFC bank refused to leave its ground and negated the grant of such moratorium.

The court gave importance to vestige of the business rather than written policy or guidelines. Further, the court recognized that even though the loans to HDFC Bank and Federal Bank can be serviced from lease receivables, non-repayment on the loan of Aditya Birla would result  into classification of the Borrower’s account as an NPA. Hence, it ordered HDFC bank to agree with other lenders and provide the moratorium benefit to the Borrower.

Moratorium: Discretion of Bank or Right of Borrower?

The spotlight question of this case is -what is the degree of discretion that bank holds in the grant of moratorium? It is to be observed that the Statement on Development and Regulatory Policies by RBI state that the purpose of moratorium is “Easing financial stress caused by Covid-19 disruption by relaxing repayment pressures and improving access to working capital.”
In the case, the payments to HDFC bank and Federal Bank could be made from Lease rentals but the payment to Aditya Birla Housing Finance would be disrupted hence classifying the Borrower’s account as an NPA.

Further, the RBI in its statement to the court submitted that the banks operate and converse to a large variety of industries, borrowers and clients, hence a single framework or tick-box checklist for deciding the eligibility for grant of moratorium would not be in interest on banks nor the borrowers. In such case, the banks are the best judge.

It was held by the court that though the banks have discretion to provide the facility of moratorium it can not refuse the benefit in the case the survival of the business is at stake.

Clearly, while the language of the notification seems to leave it at lenders’ discretion to provide moratorium, the submissions made by the RBI stated that – “Banks would have to look at the spirit of the reliefs announced by the RBI in the wake of economic fallout of the pandemic, so that eligible borrowers should not have to worry about making debt payments during the lockdown period and the discretion on the part of the lending institutions has to be exercised in a proper and reasonable manner.”

Conclusion
The moratorium is provided with an intent to safeguard the businesses which are perfectly solvent however, are unable to meet their current obligations due to disruptions caused by Covid-19 pandemic. The banks and financial institutions being a Jesus Screw of economy are to play a pivotal role in ensuring that the business and economy of the country survive as well as thrive.

The court as well as the RBI are of the view that while the grant of moratorium is discretionary, the discretion in this regard shall be exercised considering the spirit of the RBI notifications and the financial situation of the borrower. That is to say, it is on the borrower to prove that the continuity of the borrower’s business is likely to be affected due to the ongoing liquidity crunch and thus, moratorium should be provided.
 
End-Notes:

1. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11835&Mode=0
2. http://judgmenthck.kar.nic.in/judgmentsdsp/bitstream/123456789/334829/1/WP6775-20-08-07-2020.pdf