Why should RBI be answerable to SC, asks Deepak Parekh

The chairman of mortgage giant HDFC Ltd in his annual letter to shareholders, also suggested a one-time restructuring of real estate loans, easing of external commercial borrowing rules and immediate changes in regulations to allow end-to-end execution of housing loans online.

Wondering why the central bank should be answerable to a court on the basic principles of financial sector, eminent banker Deepak Parekh has said the saga of the Supreme Court questioning the RBI on loan moratorium was "indeed unfortunate".

The chairman of mortgage giant HDFC Ltd, in his annual letter to shareholders, also suggested a one-time restructuring of real estate loans, easing of external commercial borrowing rules and immediate changes in regulations to allow end-to-end execution of housing loans online.

"The saga of the highest court of law questioning the RBI on the moratorium  was indeed unfortunate.

“Why should a central bank have to be answerable to a court on basic principles which the financial sector operates on?" he observed.

The industry veteran said interest payments on borrowings and loans are contractual obligations and when no laws are being violated then all efforts at this juncture must be channelled towards economic recovery rather than getting into legal wrangles.

"These issues must be resolved smoothly and I remain hopeful that the authorities will find solutions to safeguard its stakeholders," he said.

Last month, the Supreme Court said there is "no merit in charging interest on interest" for deferred loan payment installments during the moratorium period announced in the wake of the coronavirus pandemic.

Once moratorium is fixed then it should serve the desired purposes and the government should consider interfering in the matter as it cannot leave everything to banks, the court had observed.

The RBI's March 27 circular announcing moratorium was later modified on April 17 and May 23 by which the moratorium period was extended by another three months that is from June 1 to August 31, 2020 on payment of all installments in respect of term loans (including agricultural term loans and retail and crop loans).

In the letter, Parekh lauded the RBI for shouldering a huge burden to maintain financial stability and also stressed the need for a realignment of ready reckoner rates as well.

He said the global economy has never before simultaneously seen demand and supply evaporate and the pandemic has revealed the fragility of health systems and the lack of social safety nets the world over.

At the same time, the lockdown has reinforced the value of the essentials of life -- food, clothing, shelter and now, the internet.

"There can be no better security in life than a home... HDFC is in the right business and we have done business the right way.

“There may be lags in terms of healing time, but we remain confident that the inherent demand for housing is intact," he said.

According to Parekh, FY20 has seen HDFC deliver a good performance, but by no means it was an easy year.

Risk averseness in lending heightened, further choking credit where it was needed the most... We had our share of disappointments too.

"These pertained to certain long-standing relationships we thought we were confident about. When hardships fell upon them, the legal system overrode our recovery efforts," he said.

He said the recovery efforts will continue unabated.

"In the most trying times, recent resolutions in our favour have been encouraging, sparking hope of a changing tide."

Parekh further said a scenario is emerging where there may be inorganic opportunities for HDFC group companies and some of its subsidiary companies will need additional capital for their expansion plans.

"We have also identified new investment opportunities that will help build the next generation of value creators for HDFC.

“To support this, we are putting in place a roadmap for our future capital requirements," he said.

Parekh said woes of the Indian economy predate the pandemic and pressed for solutions that do not impinge on the limited resources of the government given the immense constraints on fiscal finances.

He said the government has rightly recognised the benefits of encouraging housing, given the construction sector being the second largest employment generator and having multiplier effects through its extensive backward and forward linkages with other industries.

"A few policy changes will go a long way in supporting housing and housing finance going forward," he said, while suggesting steps to liberalise external commercial borrowings and also a one-time restructuring for real estate loans.

If developers do not have cash flows due to a slowdown in sales or delay in receiving requisite building approvals, they can neither complete the existing projects nor can they service their loans, he said.

Even if a lender is willing to help the project stay viable, any modification in the terms of the loan, including additional funding is construed to be a non-performing loan under the current regulatory norms.

"Allowing for a restructuring of these loans and categorising them as standard assets will facilitate last mile funding for these projects," he said.

Parekh also favoured changes in regulations so as to facilitate end-to-end execution of mortgages online.

"Currently, loans are being approved online, but disbursements cannot happen as e-signatures on mortgage documents or agreements pertaining to immovable properties are excluded from the purview of the Information Technology Act, 2000.

"With the immense thrust on technology in the financial sector, this amendment can easily be facilitated through an ordinance," he said.

Photograph: Reuters