Borrowers Eligible For Moratorium On Grounds Of Business Continuity, Says Karnataka High Court

The Karnataka High Court has directed HDFC Bank Ltd., Federal Bank Ltd. and Aditya Birla Housing Finance to grant a moratorium on loan repayments to a borrower from March 1 till Aug. 31. The court has also restrained the lenders from recovering loan instalments from the company as long as the moratorium is alive.

Velankani Information Systems, a Bengaluru-based information technology company, challenged the rejection of its plea for a moratorium under the Reserve Bank of India’s March 27 circular. The company had taken loans amounting to more than Rs 475 crore from the three lenders.

HDFC Bank rejected the company’s plea for moratorium citing that it was receiving rentals from its technology park operations. The other two lenders—Federal Bank and Aditya Birla Housing Finance—didn’t respond to the company initially, which prompted it to approach the banking ombudsman and also file a writ petition.

A bench comprising Chief Justice Suraj Govindaraj observed that although the RBI’s March 27 circular confers discretion on a bank for granting a moratorium, it’s mandatory for banks to ensure continuity of a viable business. As such, all borrowers are eligible to seek moratorium so that their continuity is not adversely impacted, the court said.

It has also directed the RBI—which was a party to the case—to monitor the implementation of its March 27 circular. The central bank must verify whether all banks have a board-approved policy on moratorium and must set up redressal forum to resolve grievances of the borrowers, the court said in its order.

Moratorium: Discretionary Or Mandatory

The high court examined the intent of RBI’s March 27 circular on moratorium, board approved policies and frequently asked questions issued by the three lenders to give relief to Velankani Information Systems.

On March 27, RBI had allowed banks to grant a moratorium for three months on payment of installments due between March 1 and May 31. Banks were directed to frame a policy to determine which borrowers should get this benefit. The moratorium was then extended for further three months by the RBI through a circular in May.

The high court noted that RBI’s ‘Statement on Development and Regulatory Policies’ formed the basis of the March 27 circular. It observed that one of the reasons of the policy was to ease the financial stress caused by Covid-19.

On examination of the frequently asked questions issued by the three lenders, it noticed HDFC Bank allowed all customers, including corporate and MSMEs, who have obtained a retail credit facility up to March 31 to apply for moratorium. The FAQs issued by Federal Bank and Aditya Birla Housing Finance also provided a similar eligibility criteria.

The court thus concluded:

• Power to grant a moratorium is the bank’s discretion. However, refusal to grant a moratorium must not adversely affect the survival and continuity of a business.
• It’s mandatory for banks to ensure continuity of a viable business.
• Banks cannot ‘nit pick’ between clients and refuse grant of moratorium to an eligible customer. They cannot go against the FAQs issued in the public domain.
• And lastly, all borrowers will be eligible for a moratorium if they are able to establish that rejection would affect their business continuity.

‘Moratorium Applicable To Structured Loans’

Velankani Information Systems had availed a structured loan from the three lenders and had entered into an escrow agreement for repayment. It secured the loan through a charge on cash flows, receivables and rental incomes.

Revenue generated from lease rentals, according to the arrangement, was deposited in an escrow account, out of which, HDFC Bank and Federal Bank could collect their instalments. Similarly, hotel business revenue was deposited in another escrow for Aditya Birla Housing Finance.

HDFC Bank argued that it rejected the company’s moratorium plea in line with its Board’s policy, approved by the RBI, on structured loans. It said that as long as the repayment is in the form of cash flows which haven’t been interrupted, moratorium cannot be granted. And since the company was receiving lease rentals, the relief won’t apply.

The high court rejected the bank’s contention and observed that:

• The central bank should’ve framed a methodology in its circular to determine fit cases for relief. Leaving it to the discretion of the bank could result in adoption of discriminatory or contradictory policies by banks based on their ‘whims and fancies’.
• Failure to make payment to one of the lenders will result in automatic classification of the company’s account as an NPA, which would then interrupt payments to all other lenders.
• In the absence of any alternative and effective remedy, the court will follow the objectives of RBI’s policy and circular. As such, the circular applies to structured loans as well.

The high court also directed that one bank cannot deny extension of moratorium when other consortium members are willing to extend the benefit.

‘Banks cannot act like Shylock; they have limited discretion’, says senior counsel Jayant Bhushan. Watch the interview here: