Stressed borrowers get Supreme Court reprieve over loans

Bankers are hopeful that they also won’t have to set aside funds to cover losses once a loan turns bad because of the temporary freeze in asset classification.

Banks have to make provisions of 15% when loans turn bad, as opposed to 0.4-1% for standard loans.

Repayments were expected to begin on 1 September after the six-month moratorium ended a day earlier.

This interim order will largely benefit borrowers who were on the brink of defaulting or were closer to the 90-day overdue mark, after which loans are classified as non-performing.

The apex court is hearing a petition pertaining to the issue of whether interest should continue to accrue on loans under moratorium, and the Supreme Court will next hear the case on 10 September.

Private sector banks and state-owned banks had an aggregate bad loan burden of ₹8.42 trillion as on 30 June, according to data from Capitaline.

Any loan that is overdue by more than 30 days as on 1 March is ineligible for a debt recast announced by the Reserve Bank of India.

Such loans, divided into special mention account 1 (SMA1) and SMA2, are estimated to be worth ₹5.7 trillion. Therefore, loans which can avail of the debt recast still have at least two months before they turn non-performing.

“This will affect loans that are extremely stressed and gives them an interim moratorium. What it does is it makes our job difficult as bankers since people who were so far willing to repay might take a cue and delay," said a senior banker at a private sector bank.

The interim order was passed by the bench headed by Justice Ashok Bhushan.

Continuing his arguments, Solicitor General Tushar Mehta submitted that the moratorium was introduced to defer repayment amid the covid-19 pandemic.

This was done to help businesses manage their working capital needs, Mehta said, adding that the idea was never to waive the interest.

Mehta explained that “normally, an account becomes an NPA if payment is not made for 90 days. So, the moratorium period was to be excluded." He clarified that accounts do not automatically become NPAs on 1 September.

Mehta also apprised the bench that an expert committee formulated to look into the moratorium issues will come up with sector-specific guidelines on 6 September.

Supporting this submission, senior counsel Harish Salve, representing the Indian Banks Association, added that customized plans are required to mitigate the issues of loan payment.

“Common man’s problems are different from those of the corporates. If the kind of borrowers and the type of borrowing is identified, then specified relief can be provided. Individual and industrial problems need to be addressed differently," said Salve.

Petitioner Gajendra Sharma said interest would continue to accrue during the moratorium, which ultimately the borrower would have to pay.

The petitioner also argued that no interest should be charged during the moratorium because people are facing “extreme hardship".

shayan.g@livemint.com