News and developments
A pandemic from China to India: Can Indian Financial System keep up?
Covid 19 poses a novel challenge for the financial service sector which has no parallel. Of the four key stakeholders of the financial system, i.e. the regulator(s), the lenders (including banking and non-banking institutions), the depositors, and the borrowers, Covid 19 has affected all them. The buck stops at the Government and the Reserve Bank of India (“RBI”) to rescue the financial system.
Regulatory Intervention
RBI derives its regulatory powers over financial institutions from the Reserve Bank of India Act, 1934; and the Banking Regulation Act, 1949 (“BRA”). Section 21 (Power to control advances by banking company) and Section 35A (Power to issue directions in public interest) of the BRA confer significant powers on the RBI to regulate the banking system. Exercising these powers, RBI has issued various directions to the banks to manage the impact of COVID – 19. The key highlights of such directions can be accessed in our corporate newsletter for the month of March 2020. The directions issued by the RBI to banking institutions, were in the form of enablers to the banking institutions to alleviate the stress on the consumers (including commercial borrowers). RBI has permitted the lenders registered with it to defer the payment obligation of all term loan holders (including principal, interest, bullet repayments, EMIs, and credit card dues) that were due from March 1, 2020 to May 31, 2020, amongst other reliefs. Since then, most banking institutions have passed on the benefit to the consumers making them eligible to claim deferment of their monthly instalments. This direction of RBI potentially offers short term benefits to the consumers, with the following riders:
- Deferment of payment obligation is applicable on borrowers only when their lender chooses to do so through a board approved policy. Most banking institutions have initiated processes for deferment of repayments and have reached out to their consumers. Consumers are well advised to check the fine print of the terms of deferment before making a decision.
- Interest has not been waived and will continue running during the moratorium period. While the loan tenures are expected to be increased by three (3) months, accumulated interest for the three (3) months period is recoverable immediately at the end of the moratorium which has the potential to significantly increase the payout at the end of the moratorium. With financial situation unlikely to improve dramatically at the end of the three (3) months period, borrowers may be expecting more relief.