RBI must not delegate

On March 27, 2020, the Reserve Bank of India notified the Covid-19 package to provide relief measures to industries for terms loans, working capital facilities and restructuring of stressed assets.

The Small Scale Industrial Manufacturers Association of Haryana filed a writ petition in the Supreme Court for an appropriate direction or order directing the Union of India and others to take effective and remedial measures to redress the financial strain faced by the industrial sector, particularly MSMEs due to the coronavirus pandemic. The Association submitted that the measures announced did not offer any substantial relief, aid or assistance to the borrowers.

On March 23, 2021, the Supreme Court disposed of the writ petition. It dismissed the reliefs sought by the Small Scale Industrial Manufacturers Association of Haryana, including:

(i) Total waiver of interest during the moratorium period,

(ii) Extension of the period of moratorium,

(iii) Need for sector-wise reliefs provided by the RBI and,

(iv) That the Centre/RBI must provide for further reliefs over and above the packages already extended.

However, the Supreme Court provided relief from the compound interest charged by banks and ‘directed that there shall not be any charge of interest on interest/compound interest/penal interest during the moratorium period and any amount already recovered under the same head, namely, interest on interest/penal interest/compound interest, shall be refunded or given credit/adjusted in the next instalment of the loan account’.

Further the court also vacated the interim relief granted earlier not to declare the accounts of respective borrowers as Non-Performing Assets.

The Supreme Court directions are very clear leaving no scope for differing interpretation. By and large banks are happy as the court has directed them to refund only the compound/penal interest and approved levying the contracted interest charge. As the court has not specified who has to bear this burden of refund of compound/penal interest, it is likely that individual banks will bear this cost and the government may not come to their rescue.

Now, to implement the court order, the RBI issued a notification on April 7, 2021 to banks that .

(i) The judgment should be implemented uniformly in letter and spirit by all,

(ii) The methodology for calculation of the amount to be refunded/adjusted for different facilities shall be finalised by the Indian Banks Association,

(iii) This should be in consultation with other industry participants/bodies, and

(iv) This should be adopted by all lending institutions as board-approved policy.

It is not clear why this job has been assigned to the IBA. The court direction is clear. Even if there is a possibility of any different interpretation, the RBI can to provide interpretation and direct financial institutions to implement the scheme of refund of compound/penal interest uniformly. Is the IBA more competent than the RBI?

What is the status of IBA? As claimed by the IBA, it is a voluntary association of member banks. Though neither a governmental entity nor a regulatory authority, it is not amenable to writ jurisdiction of courts nor subject to the RTI Act. Before the Chief Labour Commissioner Central (Delhi), the IBA has submitted that “the Government does not exercise control over the functioning of IBA”

It is also not clear why the other industry participants/bodies should be consulted for implementation of the court order. The Court has not provided any such direction.

One expects the central bank to do its business of regulating financial institutions without delegating that job to some other non-entity.

The writer is a retired banker

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