The Supreme Court ruled on Tuesday that banks cannot charge interest on interest for accounts that requested relief from the moratorium during the pandemic period last year and that the amount collected must be repaid in the next. disbursement of the loan account.
The deadline for such a moratorium, the Supreme Court ruled, would be August 31, 2020, after which all loans that were not repaid on schedule can be declared as non-performing assets (NPAs). Dismissing requests for an extension of the six-month moratorium period on loans, the court said that a full waiver of interest during the moratorium also could not be granted.
Banks can also start reporting bad debt (loans that have not been repaid for 90 days or more), with the court overturning the previously granted interim measure for not reporting borrowers’ accounts as NPA. In September of last year, the court ordered that accounts not reported as NPA as of August 31 should not be classified as such until further orders.
The initial moratorium came into effect in March 2020, which lasted for three months. However, in May, the Reserve Bank of India (RBI) extended the moratorium for another three months until August 31.
As of August 31, 2020, at the system level, just over 45 percent of clients are availing themselves of the RBI moratorium facility and 40 percent in terms of value. For private banks, the number of customers benefiting from the moratorium was 34.8 percent and for public banks it was 54.88 percent. But small financial banks have seen up to 82% of their customers opt for a moratorium. For non-banks, however, that number was as low as 26.58 percent. But in terms of value, they had nearly 45 percent of their outstanding credit under moratorium.
Judges are not financial experts
The three-judge bench refused to pass judgment on the extension of the moratorium period, as it was in the area of economic policies, best left to policy makers and experts. “Court interference is not necessary” in such cases, the judgment read.
The question of whether the central government and the RBI should provide additional relief beyond the relief plans already offered would “have a considerable financial implication on the economy of the country”, ruled the judges after declaring themselves convinced that “All the best can be”. offered was offered.
Importantly, the judges said that banks “must pay interest to depositors and their obligation to pay interest on deposits continues even during the moratorium period.” Many savers and institutions depend on the payment of interest by banks.
“Therefore, granting such relief from the total waiver of interest during the moratorium period would have a considerable financial implication in the economy of the country as well as in the lenders / banks,” said the judges.
However, to provide relief to borrowers, the Supreme Court ruled that any amount already charged will be refunded, credited or adjusted in the next installment of the loan.
In October 2020, the government announced a compound interest waiver program during the moratorium on low-cost loans up to Rs 2 crore. It cost the government Rs 5,500 crore.
The court observed that the Centre’s policy did not justify limiting the benefit of the waiver of interest on interest or compound interest only to certain categories of loans.
Eliminate uncertainties, improve discipline
During the December quarter, banks had benefited from a lower NPA due to the end of the ranking. However, they disclosed their deemed aggregate bad debt as “pro forma” NPA in their books and provided the total. According to an analysis by CARE Ratings, banks will now have to record at least Rs 1.2 trillion in pro forma NPA surplus in the December quarter, but these will not affect finances much as they are correctly forecast.
Analysts and bankers hailed the judgment, but some said it should have happened a little earlier and not towards the end of the year so that banks have time to step up their recovery efforts and display healthier numbers in their books.
“In any case, the lenders gave the memorandum the numbers of the NPA as well as the NPA, without taking into account the new cases. So now if a person’s account is classified as NPA, their Cibil score will be affected, ”said Keki Mistry, vice president and CEO of Housing Development Finance Corporation (HDFC).
“It improves the credit culture in the system and the economy. As a result, customers will be more aware of paying their down payments, ”Mistry said.
Former Chairman of State Bank of India (SBI) Rajnish Kumar said the observation in the judgment that financial sector issues are best left to policy makers is very important because in the future , such questions will not be immediately accepted by the Supreme Court. “The government and the RBI are capable enough to think about what needs to be done best for the financial sector as they need to preserve financial stability. The judgment is recognition of that,” Kumar said.
“The judgment puts an end to many uncertainties. Banks can now properly close their accounts, speed up their recovery process and continue their normal business activities, ”Kumar said.
However, petitioners who called for the moratorium to be extended have said many accounts are still under stress and could end up haunting banks.
“As the SC has rejected any sectoral redress, in addition to what has been granted by the RBI, 97.5% of borrowers in sectors such as real estate would be affected, resulting in various civil consequences,” said a lawyer representing one of the petitioners.
“This would result in a large number of accounts becoming NPAs due to insufficient relief provided by the RBI,” the lawyer said, requesting anonymity. In view of this, it would be very difficult for borrowers to ease the burden of their debt, he added.
Accounts with more than Rs 2 crore owed should also get some interest reversal on their books, but it is not yet clear whether the government will bear the cost or the banks themselves, according to a senior banker.
“It is more likely that the government will bear the cost. In any case, most of these cases concern public sector banks. If the banks have to bear the cost, it will affect their financial position and the government will end up losing on the payment of dividends, ”said a senior banker asking for anonymity.
Anil Gupta, vice president of financial sector ratings at ICRA, said the government will have to spend an additional Rs 7,000-7,500 crore to provide compound interest waiver to borrowers with loans over Rs 2 crore. This would be in excess of Rs 5,500 crore provided for the exemption of interest on interest on loans up to Rs 2 crore, he added.
“Charging interest on the interest would ultimately have diluted the relief given by the Reserve Bank of India to distressed borrowers and they could possibly be in a worse position than the pre-COVID stage,” he said. said Siddharth Srivastava, partner of Khaitan & Co.