Moratorium and declaration of Accounts as NPA amid COVID-19

April 15, 2020
RBI clarifies Co-operative societies

By Nihit Nagpal & Tulip De 

Delhi High Court restraining order against Punjab & Sindh Bank

The Reserve Bank of India vide its circular dated March 27, 2020 had announced certain regulatory measures to mitigate the burden of debt servicing brought about by disruptions on account of COVID-19 pandemic and to ensure the continuity of viable businesses by providing up to three (3) months Moratorium/Deferment on their instalment/interest payments falling due between March 1, 2020 to May 31, 2020. The impact of such regulatory measure was observed in the order passed by High Court of Delhi adjudicating a Stay Petition through video conference facility on April 13, 2020 in the case of Shakuntla Educational & Welfare Society vs. Punjab & Sind Bank[1], in the present  case, with respect to a default which first became due on December 31, 2019, the Delhi High Court restrained Punjab and Sindh Bank from declaring the loan accounts of Shakuntla Educational & Welfare Society as a non-performing asset.

The Petitioner i.e. Shakuntla Educational & Welfare Society had moved the the Hon’ble Delhi High Court in order to seek a direction against Punjab & Sind Bank (Respondent) for not declaring its pending loan accounts as Non-Performing Assets (NPA). The Petitioner had also prayed for grant of moratorium of three months in terms of the circular issued by the Reserve Bank of India (RBI) on March 27, 2020[2].

The counsel for the Petitioner had made the following submissions:

  1. That the petitioner is a charitable society engaged in the business of technical and higher education and in order to set up the educational institutions, the petitioner had availed six term loans from the respondent/Bank out of which four term loans stand fully repaid in accordance with the restructured repayment plan.
  2. The Petitioner had also contended that even qua the remaining two term loans that were being referred to as term loans ‘V’ & ‘VI’, the petitioner had been diligent in making repayments in accordance with the restructured plan, but before the instalments payable in March 2020 could be paid, the pandemic COVID had set in and consequently the RBI in order to ease the financial crises being faced by borrowers, has vide its circular dated March 27, 2020 provided a moratorium of three months in respect of all term loans as outstanding on March 1, 2020. Hence, the petitioner majorly relied upon the regulatory measure issued by RBI on March 27, 2020 in view of which, a 90 days moratorium qua the instalments, which became payable after March 1, 2020 must have been granted to it. Therefore, the Respondent cannot declare the petitioner’s accounts as NPA on account of its failure to pay the instalments, which were payable on or before March 31, 2020.
  3. Additionally, the counsel of Petitioner further submitted that since the various Institutes run by the Petitioner were educational institutes situated in the State of Uttar Pradesh, where the State Government has issued a specific directive prohibiting the petitioner from coercing the students to pay the due fees, the petitioner on account of its inability to collect or demand pending fees from the students, was not in a position to repay the instalments as payable in March 2020 qua the term loan V & VI.

Whereas, the counsel for the Respondent/Bank vehemently opposed to the grant of interim relief by primarily made the following submissions:

  1. That  the moratorium as envisaged by the RBI is applicable only qua instalments which has became payable on or after March 1, 2020 and not qua those which had become due prior to March 1, 2020. Therefore,  as per the restructured payment plan, the petitioner was liable to make payment of quarterly instalments, and the default qua instalments in respect of which the Respondent is proposing to declare the petitioner’s accounts as NPA had already fallen due on December 31, 2019 and, therefore, the petitioner cannot take the benefit of  moratorium envisaged by the RBI Circular Dated March 27, 2020. in
  2. The Respondent further contended that the Statement of Development Regulatory Policy dated March 27, 2020 does not include any moratorium in cases of instalments which had already become due prior to March 1, 2020. Additionally, the RBI’s circular dated March 27, 2020, on which reliance is being placed by the Petitioner, can in any event have  overriding effect on a  Regulatory Policy, which does not provide for deferment of an account being classified as NPA on account of the pandemic of COVID 19.

After hearing the contentions of both the parties  the Hon’ble High Court observed that a prima facie case has been made out in favour of the Petitioner for restraining the Respondent/Bank from declaring the Petitioner’s accounts as NPA, while the countrywide lockdown was still continuing.

The Hon’ble Court stated that:

Any classification of the petitioner’s accounts as NPA would certainly amount to altering the position as existing on 01.03.2020 and, therefore, grave and irreparable loss will be caused to the petitioner, in case, its accounts are declared as NPA, only on account of its failure to pay the instalments, which were admittedly payable on or before 31.03.2020.

The Hon’ble Court has directed that till the next date, the Respondent/Bank are  restrained from declaring the Petitioner’s accounts as NPA. However, it has been  made clear by the Court that if the directive issued by the State of Uttar Pradesh prohibiting the petitioner from demanding fees from its students is withdrawn before the next date, the Petitioner would be liable to pay the remaining instalments within one week (1 week) from the date of the said withdrawal. The Hon’ble Court has noe  adjourned the matter till May 4, 2020 and meanwhile, has directed the parties to complete pleadings.

[1] W.P.(C)2959/2020 & CM APPL.10272/2020 (for stay)

[2] https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11835&Mode=0

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