This article is written by Abhinav Anand, a student pursuing B.A.LL.B(Hons.) from DSNLU,Visakhapatnam. This article deals with the effects of not paying EMI during the COVID-19 lockdown. It also discusses the moratorium that is imposed by the RBI. It suggests changes in the policies to scale up the economy. 

Introduction

The recent pandemic in the country has shocked everyone. The outbreak has adversely affected the lives of people. The social and economic status has been badly hit by the lockdown imposed to curb the menace of COVID-19. The Finance Minister after considering the fact that people are left with no financial sustenance imposed the moratorium of 3 months on every kind of loan from banks or non-banking financial corporations. The Finance Minister has also provided for the relief funds for the marginalised community of the country. The article critically analyses the after-effects of the imposition of moratorium. It also discusses the force majeure clause which is applicable in extraordinary situations. It concludes by suggesting changes in the system that could prevent the people from suffering from such a kind of pandemic in the future.

What would happen if you are not able to pay EMIs during covid lockdown?

A recent interview by Finance Minister

The Finance Minister Nirmala Sitaraman has addressed the RBI to allow the moratorium for few on all kinds of loans. The intention behind this move is to ensure that borrowers should not face economic problems. In the wake of the COVID-19 outbreak the country has been locked down. Due to lockdown all the businesses are shut down, so it will be tough for the borrowers to pay the equated monthly installments of the loans.

Moratorium

Moratorium is a period in which the bank allows its customers to defer from paying payments of the EMI of their loans. It is allowed to counter the extraordinary situation. The recent imposition of moratorium for 3 months is because of the lockdown imposed by the government due to COVID-19. The bank only allows relaxation of the envisaged time for payment of the EMI, it does not provide any kind of waiver. In the current situation, the moratorium imposed will be availed by the customer after the customer notifies the bank about his critical financial condition. The other method of availing the moratorium is when a customer bank account has no deposit for credit in the loan then the bank will consider that customer has availed the facility of the moratorium. 

Exemption for three months

The RBI after considering the request of the Finance Minister has imposed the moratorium for three months on every kind of loan. The borrowers of the bank had to notify the bank that they wanted to avail of the facility of the moratorium. If the customer fails to notify the bank, then the bank can take money from the account of the borrower. 

How will it affect the economy 

If 50% or more borrowers opt for the moratorium, then the additional liquidity provided by the RBI would be less than the amount received by the bank through EMI and interest payment. In this case, the bank will be unable to lend money after three months and also the bank won’t be able to disperse the amount of fixed deposits. The situation can become worse if the entire banking sector will be under a liquidity crunch. The long term projects of private builders will stop. The situation will lead to unemployment on a large scale. The effect will be on the marginalised labourers who have already lost their jobs due to lockdown. The Bank will need a huge influx of money through bailout from the Government. If the influx of money is not done immediately it will make the situation worse. The economy of the country will collapse immediately. The developmental activities will come to a halt. 

The move of RBI could possibly put the Non-Banking and Financial Corporations at higher risk. The high credit deposit ratio will adversely affect the lending capacity of the banking institution. The banks will be under a liquidity crunch because of no deposit of the loan amounts. The banking institution will rely on the Cash Reserve Ratio or they will move to RBI for the loans, this will increase the burden on RBI.

Is Force Majeure applicable in the current situation? 

According to the Cambridge Dictionary, the term “Force Majeure” means war, crime or earthquake that prevents the completion of the act mentioned in the legal agreement. 

The recent lockdown is imposed to limit the spread of the COVID-19. The lockdown process has stopped performances of different kinds of works such as construction work, development of new establishments, production of new products. The situation is an unexpected event.

These are the conditions that must be fulfilled to call the event as a force majeure event:

1. The unexpected event occurred: the event occurred which is beyond the control of either of the parties to the agreement.
2. The parties to the event assumed that such an event would not occur: the non-performance of the party will not be excused if the event occurred is foreseeable and the party had prior knowledge that it might stop them from executing the same.
3. The parties have taken all the measures to perform the contractual obligations to the agreement or at least to mitigate the damages: the party seeking the clause of force majeure has to perform all the necessary conditions. The party has to inform the other party as soon as possible that the entrusted duty cannot be performed by them because of the unforeseen circumstances.

Further, in this case the force majeure clause frustrates the very intent of the agreement. It terminates any kind of contractual obligation on either of the parties due to the unforeseen circumstances. For instance,if any agreement becomes unlawful after any government notification then the force majeure clause will be applicable. For instance, any agreement becomes unlawful after any government notification then the force majeure clause will be applicable.

In Satyabrata Ghose vs. Mugneeram Bangur & Co, the Supreme Court had adverted Section 56 of the Indian Contract Act, 1872. The Supreme Court held that the word impossible in the section has not been used in its physical and literal impossibility. To avail the force majeure clause in any of the events, it is not necessary that mere literal impossibility doesn’t need to attract the force majeure. It is the mere impracticality of the event, given the parties to the agreement, if the objective of the agreement cannot be achieved by any event then also the force majeure can be invoked. Due to any untoward incident or unanticipated change which upsets the very foundation of the contract then the force majeure clause can be invoked.

In Naihati Jute Mills Ltd. vs. Hyaliram Jagannath, the Supreme Court referred to the English law on frustration and observed that a contract is not frustrated merely because the terms of the contract are altered. The contract becomes frustrated because the objective of the contract might not be achieved because of unforeseen circumstances. 

In Philips P.R. Core, Inc vs. Tradax Petroleum Ltd., it was observed that the basic purpose of force majeure clause is, in general, to relieve a party from its contractual duties when its performance has been prevented by a force beyond its control or when the purpose of the contract is frustrated.

Effects of the crisis

Credit Pressure will rise in the company

The lockdown has disrupted businesses and hit the income of different establishments. The increased credit pressure is evident in many companies. The credit ratings have marked the growth negative. The intensifying pressure has been witnessed by the credit rating agency,CRISIL, which marked their growth negatively. The effective measures need to be taken otherwise the companies will not be able to revamp from the shock for a long time.

The rise in the number of bad loans

The recent move of RBI to grant moratorium will lead to a surge in bad loans of the mid-sized and small companies. The revenue returning problem will stop the mid-sized company from having cash inflow which in turn will hamper their growth. The public sector banks are already hit by the rising NPA so the existing condition will further make the situation worse.

By how much the bad loans will rise?

Before the virus outbreak, India’s economic growth was pegged at 4.7% in the 3rd Quarter of the fiscal year 2020. The RBI’s financial stability report projected the growth of gross NPA under the banking sector just below 10%. 

What will happen if bad loans increase? 

With the increase in large numbers of bad loans the bank will not be able to give the loans to other borrowers, this will lead to restriction to the expansion of the businesses across the country. The financial stability of the country will be at risk.

Will the Centre bailout funds to recapitalize funds?

The bank saddled with the high non-performing assets will most likely see the infusion of funds from the investors. The regulatory frame of the RBI will be relaxed to prevent the banks from Prompt Corrective Action. The Centre and RBI will devise a strategy to counter the measures of the COVID- 19 lockdown. The planned strategy needs to be implemented soon after the situation returns to normalcy. The government should adopt an aggressive approach and expedite the process of investment. 

What are the methods to revive the economy?

These are the following methods adopted by the government to revive the economy:

1. The revocation of the high tax rate that increased recently. This will help the foreign portfolio investors to invest in the country.
2. The corporate tax rate must be reduced and the exemptions must be removed.
3. The restriction imposed on the listing companies of having 35% public holding must be removed.
4. The statutory liquidity ratio must be reduced and the state bank should lend instead of buying the government security debt.
5. The quality review of non-banking financial corporations should be done and the one which is in healthy condition must be provided with the incentives to help the economy.
6. The incentives must be provided to the housing and automobile sector to revive the demand. The removal of time-bound obligations will help to scale up the investments.
7. The restrictiction imposed on E- Commerce should be removed. The export-oriented sectors should be provided with the special credits and duty-free access.
8. The freight rates of railways must be reduced and the cross-subsidisation of fare must be reduced.
9. The Corporate Social Responsibility under Companies Act, 2013 should be removed.
10. The Essential Commodities Act must be revived and the Agriculture Produce Market Committee (APMC) to liberalise the farm sector.
11. The subsidies provided in the variety of sectors should be removed and the focus should be shifted towards the PM-KISAN(Prime Minister Kisan Samman Nidhi) and MGNREGA(Mahatma Gandhi National Rural Employment Guarantee Scheme).
12. The Food Corporation of India should be reformed and the trade of pulses, cereals, encourage trade in lentils, horticulture and animal husbandry.
13. The incentivisation of refrigerated storage should be done to keep the produce of farmers safe.
14. The strategic planning and new industrial policy will attract the company leaving other countries because of strict regulations. 
15. The new tourism policy should be announced to attract tourism in the country.
16. The establishment of a Special Economic Zone in the country will create opportunities for the labourers.
17. The Public-Private-Partnership should be increased to complete the work in time and with accountability.

Conclusion

The steps taken by the government is commendable. But, when one analyses the situation in general, it shows many loopholes which must be bridged immediately. The aftereffect of the situation will be worse. The Indian Economy will suffer shocks and recession can also occur. The economists and many rating agencies have projected the GDP growth to be lower than the last year. The plight of migrant labourers who lost their jobs due to lockdown will further worsen their situation. The country needs a robust plan to scale up the economy on every front. The government should influx huge capital to ramp up the trajectory of the economy.

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