Moratorium on loans: a balancing act
By Shivanand Pandit
In immense relief, the Supreme Court ordered the waiver of compound interest (interest on interest) for all borrowers who took advantage of a loan moratorium in 2020 as part of the pandemic aid measures. the RBI. The verdict was greeted by many banking industry experts who said it gave a clear picture of the waiver of interest and the categorization of bad debts.
A bench of judges Ashok Bhushan, RS Reddy and MR Shah said: “Once the payment of the deposit is postponed until March
27, Circular 2020, the non-payment of the deposit during the moratorium period cannot be considered voluntary and therefore there is no justification for charging interest on interest / compound interest / penal interest for the period during the moratorium.
With the intention of reducing stress on borrowers during the Covid-19 crisis last year, the RBI allowed banks and all other financial institutions to extend a moratorium or suspend term loans and advances. The moratorium was just a postponement of IMEs, not a waiver. However, banks were asked to also waive the interest amount during these six months. Considering the huge cost involved, the banks rejected a full waiver. There have also been calls asking for the moratorium period to be postponed beyond six months.
the short Supreme decreed against the total waiver of interest to borrowers. Nonetheless, he said charging compound interest equates to criminal interest and that all borrowers should be compensated for such interest earned during the moratorium phase. The court also mentioned that no further deferrals would be granted on the moratorium and indicated that banks can start labeling non-performing assets (NPAs).
In view of the payment of interest by depositors, the RBI and the government argued that forfeiting the full amount of interest would be detrimental to the banking industry. The government has said that a complete waiver of interest could put a burden of around Rs 6.00,000 crore on the banking system and it would be a nightmare for an economically constrained government or a capital-strapped banking sector. But then there was some consent to waive compound interest.
According to investment information and credit rating agency estimates, the overall cost of waiving compound interest is expected to be around Rs.15,000 crore. However, partial payment of the full cost has already been made by banks for borrowers with loans of less than Rs 2 crore. Therefore, the residual charge will not be huge and is estimated to be between Rs 7,500-8,000 crore.
The government had indicated that it would reward the banks for sacrificing compound interest. It is not known whether the government will absorb all of the burden or transfer some of it to the banks. Either way, the court said all borrowers, including those with loans over Rs 2 crore, should get the compound interest waiver.
the short Supreme rejected requests for further relief beyond the packages already suggested. This includes sector aid. The court had asked banks to end the cycle of NPAs to help borrowers affected by the pandemic and ordered them not to label accounts that were standard on August 31, 2020 as NPAs. This had created problems for the banking sector in terms of asset classification. However, the Court has lifted this suspension now. It will not be difficult for the banks to deal with the sudden lifting of the temporary suspension of the NPA classification by the Court, as they were already reporting pro forma NPAs and creating additional provisions.
The court’s decision to refuse to extend the six-month loan moratorium and allow banks to label accounts that have not paid EMI since August 31, 2020 as APMs has fueled hope. Lenders can now initiate collection proceedings after the court revoked the status quo on asset consolidation, which prevented strained accounts from sliding into NPAs. In addition, the order will provide more clarity to investors in the banking segment.
Industry experts were tense that banks would have to make additional arrangements after the Supreme Court lifted the restriction on APMs. However, they said the difference between gross and net NPAs is Rs 30,000 crore, noting that banks have provided around Rs 30,000 crore for potential bad loans and advances. This bears the cost of supply to a large extent and the load seems manageable. They also mentioned that the compound interest judgment could lower bank income in the short term, but long-term growth was not damaged.
Expert banker Uday Kotak praised the Supreme Court’s order on the moratorium on lending and said it was a business decision that banks should accept. According to CRISIL Ratings Senior Director Krishnan Sitaraman, banks’ gross NPAs are expected to be 7% as of December 31, 2020, and if there was no NPA suspension, they would have been 8%. According to Chief Economist and Head of Real Estate Research and Intelligence, India, JLL, Samantak Das, the refusal not to extend the moratorium period is unlikely to have a significant impact on developers because little of them had chosen the moratorium in the first place.
The court took a very cautious decision in not allowing a full waiver of interest, which would have had a severe impact on the banking industry. The collection of compound interest would ultimately have weakened the relief given by the RBI to delinquent borrowers and they could possibly face a worse situation than the pre-pandemic period. It is therefore a win-win situation for all parties concerned.
The court’s ruling also shows that it would prefer not to interfere in matters of policy unless they raise constitutional questions or natural justice concerns. Therefore, the question of the duration of the moratorium on the NPA was not favored by the Court, while the waiver of compound interest is considered a solution to force majeure.
Although steps have been taken by the RBI since May 2020 to prevent a liquidity problem from turning into a solvency setback, the struggles awaiting the Bankruptcy Insolvency Code, which has again come into force, are an estimate for anyone. In addition to resolving the “twin balance sheets” of banks and companies, a recovery in credit would henceforth justify an upturn in macroeconomic situations.
Overall, the Supreme Court’s verdict rightly balances the interests of businesses and consumers.
—The Writer is a financial and tax specialist, author and speaker based in Margao, Goa