The controversy over Kerala Gramin Bank’s decision to deduct loan EMIs from the emergency relief funds given to survivors of the July 30 Wayanad landslides has sparked substantial debate about the appropriateness of the bank’s actions. This situation raises important questions about regulatory frameworks, ethical considerations and humanitarian principles. While rescue and relief efforts are critical in such a disaster, there are also significant concerns about rehabilitation, financial stability and the broader challenge of restoring normalcy.
How Kerala dealt with Wayanad landslides aftermath financially
The Kerala government’s provision of Rs 10,000 per person as emergency assistance was aimed at offering immediate support to those affected by the Wayanad landslides. According to the Times of India, The intention behind this aid was to provide financial relief without encumbrances, enabling survivors to address their immediate needs. The deduction of EMIs from these funds contradicts the purpose of the relief, which is to support recovery and rebuilding.
Regulatory and legal framework
Disaster Management Act, 2005: The Disaster Management Act, 2005 establishes a legal framework for disaster management, including relief and rehabilitation. Although the Act does not explicitly address loan deductions from relief funds, it emphasises that disaster relief should effectively address the urgent needs of affected populations. The primary objective of these funds is to support immediate recovery and rebuilding efforts, suggesting that they should not be allocated for settling existing debts.
National Disaster Management Policy: The National Disaster Management Policy highlights the need for direct and sufficient relief to those affected by disasters. It supports the principle that relief funds are meant for recovery and should not be diverted for purposes such as loan repayments. This principle implies that financial institutions should adopt a flexible approach during crises to ensure that relief measures serve their intended purpose.
What RBI guidelines say
The RBI provides guidance on financial relief measures during emergencies. While specific circulars related to the Wayanad disaster may not be available, RBI guidelines typically include recommendations for moratoriums on loan repayments and the avoidance of automatic deductions from relief funds. The general expectation is that banks should demonstrate flexibility in managing accounts affected by disaster relief, thereby supporting the immediate recovery efforts.
In the Master Direction – Reserve Bank of India (Relief Measures by Banks in Areas Affected by Natural Calamities) Directions, 2018, it is mentioned in the Discretionary Powers to Branch/Regional Office of banks that “The Branch/Regional Office Managers of banks may be vested with certain discretionary powers to avoid the need to seek fresh approval from their Head Office regarding the line of action decided by the District Consultative Committee/State Level Bankers’ Committee. Some of the areas, among others where such discretionary powers are vital may be the adoption of scale of finance, need based restructuring of loans, extension of loan period, margin, security, sanction of new loan keeping in view the total liability of the borrower arising out of the old loan where the asset financed was damaged or lost as a result of the natural calamity and the new loan financed for creation/repair of such asset(s).”
Similarly, the circular Relief measures by banks for flood affected states (RBI/2009-10/566, dated August 24, 2009) directed banks to extend relief measures such as waiving penal interest and rescheduling loans for individuals affected by floods. This directive was intended to provide immediate financial relief to those impacted by natural disasters. Importantly, the circular advised banks to handle relief funds with sensitivity and to avoid automatic deductions from such funds for loan repayments. In this circular the RBI said in the part Restructuring of existing loans:
“As the repaying capacity of the people affected by natural calamities gets severely impaired due to the damage to the economic pursuits and loss of economic assets, relief in repayment of loans becomes necessary in areas affected by natural calamity and hence, restructuring of the existing loans will be required. The principal amount of the short-term loan as well as interest due for repayment in the year of occurrence of natural calamity may be converted into term loan. In case of term loans the installment of principal and interest due in the year of occurrence of natural calamity may also be converted into term loan.
“The repayment period of restructured term loan may vary depending on the severity of calamity and its recurrence, the extent of loss of economic assets and distress caused. Generally, the restructured period for repayment may be 3 to 5 years. However, where the damage arising out of the calamity is very severe, banks may, at their discretion, extend the period of repayment ranging up to 7 years and in extreme cases of hardship, the repayment period may be prolonged up to a maximum period of 10 years in consultation with the Task Force/ SLBC.
“In all cases of restructuring, moratorium period of at least one year should be considered. Further, the banks should not insist for additional collateral security for such restructured loans.”
In circular number – RBI/2019-20/186 titled COVID-19 – Regulatory Package on March 27, 2020, the RBI provided for a moratorium of three months on term loans for all borrowers which could be extended based on further assessments and the interest would continue to accrue during the moratorium period. It recommended that banks and financial institutions should adopt a humanitarian approach and be flexible in their treatment of relief funds. While the circular specifically addressed COVID-19, its principles suggest that similar approaches should be considered in other emergencies.
Ethical and humanitarian considerations
The UN Guiding Principles on Business and Human Rights advocate that businesses, including banks, should respect human rights and avoid contributing to adverse impacts. In the context of disaster relief, this implies that banks should ensure that relief funds are used to address immediate needs rather than being directed towards existing liabilities. The principles highlight the importance of maintaining a human rights-based approach in managing financial operations during crises.
Following rulebook or ruthless?
Kerala Gramin Bank’s decision to deduct loan EMIs from the emergency relief funds provided to survivors of the Wayanad landslides appears to be inconsistent with both regulatory expectations and humanitarian principles. The Disaster Management Act and National Disaster Management Policy emphasise the need for direct and effective relief to affected individuals, while RBI guidelines and BCSBI codes suggest a more flexible approach during crises. Ethical considerations, including fairness and human rights, further reinforce the expectation that relief funds should be used solely for recovery efforts.
The bank’s actions, while technically in line with its internal policies, failed to account for the exceptional circumstances faced by the disaster victims. Rectifying the situation by returning the deducted amounts is a necessary step to ensure that relief funds fulfill their intended purpose and support the recovery and rebuilding efforts of those affected.
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Why Kerala Gramin Bank’s loan deductions from relief funds are fuelling debate
