Loan Moratorium: ‘No full interest waiver, longer relief’

Ending an intense legal battle that dragged on for several months, the Supreme Court on Tuesday refused to alter the broad contours of the Covid-related six-month loan moratorium package by accepting the government-RBI duo’s view that complete interest relief for all classes of borrowers would jeopardise the banking system. It also declined to extend the six-month moratorium period that ended on August 31, keeping in view the interest of depositors, banks and the larger financial sector.

The apex court also vacated a September 3, 2020, stay order that restrained banks from declaring NPAs loan accounts that were not classified as NPAs prior to August 31, 2020. Economic policy decisions were best left to the government, the court said and stated that the instant one passed the test of lack of arbitrariness.

However, the court extended the compound interest relief, which in an October 2020 government directive was restricted to loans up to Es 2 crore, to all borrowers, saying no distinction could be made between small and large borrowers. Icra said the move could cost a total of Rs 13,500-14,000 crore to the exchequer if the government agrees to foot the bill. Given that compound interest waiver for borrowings up to Rs 2 crore which was estimated to cost ~`6,500 crore to exchequer, the extra cost due to the latest ruling could be Rs 7,000-7,500 crore, the rating agency said.

Still, the apex court ruling came as a relief to the banking industry and the financial sector as a whole, as blanket interest waiver or an extension of the relief period would have been a big shock to it. Banks have been apprehensive about the SC’s stance, as it had made many observations during the course of the hearing of the case, showing its concern for the onerous interest burden on the borrowers hit by the economic turmoil, including the real estate and power companies.

Banking stocks gained thanks to the verdict: Nifty Bank index closed at 34,184.4 on Tuesday, up 1.73% from the previous close.

The government and RBI had consistently argued against a blanket waiver of interest on all the loans and advances given to borrowers during the six-month moratorium period that ended on August 31, saying, “this will mean forgoing an estimated over `6 lakh crore”. The government at one point told the court that in the case of State Bank of India alone, waiver of six months’ interest would completely wipe out over half of the bank’s net worth which it has accumulated over nearly 65 years of its existence.

In the latest order, the SC restrained lenders from charging interest on interest/compound interest/penal interest during the six-month loan moratorium period between March 1 to August 31, 2020.

Rejecting on a batch of petitions seeking extension of the loan moratorium period and other reliefs, the bench comprising justices Ashok Bhushan, R Subhash Reddy and MR Shah said a complete waiver of interest during the moratorium period cannot be granted as banks have to pay interest to depositors, pensioners etc. and this “would have a far-reaching financial implication in the economy of the country as well as the lenders/banks”.

“Therefore, when a conscious decision has been taken not to waive the interest during the moratorium period and a policy decision has been taken to give relief to the borrowers by deferring the payment of installments and so many other reliefs are offered by RBI and thereafter by the bankers independently…, the interference of the court is not called for,” the Bench said.

“Merely, since the reliefs announced by the UoI/RBI either may not be suiting the desires of the borrowers, the reliefs/policy decisions related to Covid-19 cannot be said to be arbitrary and/or violative of Article 14 of the Constitution of India,” it said.

“However, it is directed that there shall not be any charge of interest on interest/compound interest/penal interest for the period during the moratorium and any amount already recovered under the same head, namely, interest on interest/penal interest/compound interest shall be refunded to the concerned borrowers and to be given credit/adjusted in the next instalment of the loan account,” the apex court said.

The government had in October last year granted waiver of interest on interest on loans up to `2 crore only so as to support individual borrowers and medium, small and micro enterprises (MSMEs) during the Covid outbreak. Besides MSMEs, the loan relief was meant for personal, housing, education, auto and consumer durables loans, and credit card dues. However, the government had then ruled out any waiver for big borrower, saying it would impact the depositors’ interest.

The SC noted that the Kamath Committee had gone into sector-specific issues and its recommendations had been substantially accepted by RBI in its September 7 circular that provided for separate threshold for 26 sectors, including power, real estate and construction. “…every sector might have suffered differently and, therefore, it will not be possible to provide sector specific/sector-specific reliefs. The petitioners cannot pray for sector specific relief by either waiver of interest or restructuring by way of present proceedings under Article 32 of the Constitution of India and the question of such financial stress management measures requires examination and consideration of several financial parameters and its impact,” the judgment stated.

The petitioners, including real estate and power companies, had argued that a standard account should not have been declared NPA, when moratorium was in force. “Eligible borrowers’ accounts should continue to be classified as ‘standard”, Kapil Sibal said, who appeared for realtors’ body Credai had contended, adding that the Kamath Committee was set up to regulate parameters between the borrowers and lenders, and “it has nothing to do with the Covid-19 disaster”.

On March 27 last year, RBI had announced a moratorium on loan instalments due between March 1 and May 31 and subsequently extended it by three months till August 31, 2020.

The SC ruling came on a batch of pleas filed by power sector and real estate bodies, business associations, and individuals demanding an extension of the moratorium beyond August 2020.

The Kamath Committee set up by the RBI has recommended financial parameters for debt restructuring of 26 sectors affected by Covid-19. For corporate accounts (other than MSMEs with up to `25 crore exposure) which were up to 30 days overdue as on March 1, 2020, the framework of August 6, 2020, provides lenders and borrowers various ways of ensuring viability. At the same time, the prudential framework of June 2019 continues to be available for cases not covered under the August 6 framework.