'RBI's COVID-19 Relief Measures Not Concession Of Loan Agreement Due To Borrower's Financial Difficulties': Kerala HC
The Kerala High Court has observed that the reliefs provided by the Reserve Bank of India for borrowers against hardships caused by the Covid-19 pandemic cannot be treated as a concession or change in terms and conditions of loan agreements due to the borrower's financial difficulty.
In that context, the Bench of Justice Anil K Narendran and Justice Basant Balaji observed that, "As per the provisions contained in the Reserve Bank of India (Prudential Framework for Resolution of Stressed Asst) Directions, 2019 any resolution plan implemented under the guidelines of ‘Prudential Framework’ which involves granting of any concession on account of financial difficulty of the borrower entails an asset classification downgrade, except when it is accompanied by a change in ownership, which allows the asset classification to be retained as or upgraded to standard, subject to the prescribed conditions."
Subsequently, it was held that, "The reliefs in Exts.P1 to P3 circulars are provided specifically to enable the borrowers to tide over the economic fallout from Covid-19. Therefore, it is provided in Exts.P1 to P3 circulars that the reliefs granted in terms of those circulars will not be treated as concession or change in terms and conditions of loan agreements due to financial difficulty of the borrower under Para.2 of the Annexure to Reserve Bank of India (Prudential Framework for Resolution of Stressed Asst) Directions, 2019."
Counsel Sunil Shanker and Counsel Vidya Gangadharan appeared for the appellant, while Senior Advocate George Poonthottam appeared for the respondents.
In this case, Parthas Textiles (borrower) sought a writ of mandamus against South Indian Bank Ltd. The borrower sought consideration of representations for One-Time Restructuring and Two Years of Moratorium, citing RBI circulars related to Covid-19 stress.
The appellant bank rejected the requests, stating an overdue amount and non-compliance with restructuring criteria. Prior communications highlighted reasons for denial, including stress identified in previous credit reviews and unsatisfactory key ratios. The appeal challenged the Single Judge's decision favoring the borrower's plea.
The High Court noted that the borrower was under severe stress even before the Covid-19 pandemic period. With that background, it was observed that, "A reading of the provisions contained in the aforesaid circulars would make it explicitly clear that the reliefs provided thereunder are intended to borrowers facing stress on account of the economic fallout of Covid-19 pandemic. While extending the reliefs, the lending institutions shall satisfy themselves that the same is necessitated on account of the economic fallout from Covid-19. Further such reliefs extended shall be subject to subsequent supervisory review with regard to its justifiability on account of the economic fallout from Covid-19."
In light of the same, it was held that, since the borrower was under severe stress even before Covid-19 pandemic period, which had potentially impacted its long-term viability even before Covid19 pandemic period, it was not entitled to the reliefs provided in the resolution framework.
In light of the same, the appeal was allowed and the order passed by the Single Judge was set aside.
Cause Title: The South Indian Bank Ltd. vs Parthas Textiles & Ors.
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