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September 3, 2020

Accounts not declared as NPA’s as on 31st August, shall not be declared so until further notice : Supreme Court

by CA Shivam Jaiswal in Corporate Law

Accounts not declared as NPA’s as on 31st August, shall not be declared so until further notice : Supreme Court

The economic impact of the 2020 coronavirus pandemic in India has been largely disruptive. The lockdown though necessary has led to a disastrous impact on the economy.

The Government of India announced a variety of measures to tackle the situation, from food security and extra funds for healthcare and for the states, to sector related incentives and tax deadline extensions. The RBI too had announced various measures to the curb the economic impact of the pandemic.

The Reserve Bank of India (RBI) announced an extension of the moratorium on term loan EMIs by three months, i.e. till August 31, 2020 in a press conference dated May 22, 2020.

The earlier three-month moratorium on the loan EMIs was ending on May 31, 2020. This makes it a total of six months of moratorium on loan EMIs (equated monthly instalment) starting from March 1, 2020 to August 31, 2020. 

The extension of the three-month moratorium on repayment of term loans means that borrowers will not have to pay their loan EMI instalments during such period as prescribed by the RBI.

The Supreme Court heard petitions seeking an extension of the moratorium period on repayment of loans and to waive off the interest on interest on the loan amount in view of the COVID-19 pandemic.

What do you mean by a moratorium?

A moratorium is a temporary suspension of an activity or a law until future events warrants lifting the suspension or related issues have been resolved. Moratoriums are often enacted in response to temporary financial hardships. A moratorium period in banking is a period during a loan term when the borrower is not obligated to make a payment. It is a waiting period before the borrower starts making fixed monthly payments.

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Petitions before the SC on whether should banks waive the interest component for term loan borrowers who availed the moratorium facility between March and August

  • At this stage, neither the Reserve Bank of India (RBI) nor the banks have a say in this matter.
  • The final decision of Supreme Court, where the hearing is on in this case, will have a major impact on the banking sector, or the borrowers, depending on the outcome.
  • Conflicting opinions were placed before the Apex Court.
  • Justice Bhushan observed that banks should not declare accounts as non-performing assets (NPA) for two months and banks must not take coercive action against borrowers.
  • Those who wanted the waiver said that loan moratorium was introduced as a crisis response measure by the RBI.
  • Banks were asked to implement the scheme to help the stressed borrowers.
  • Charging interest on interest during the moratorium period will be adding to the burden, not helping them.
  • Hence, the interest amount for the moratorium period should be waived entirely.
  • Solicitor General Tushar Mehta told the SC that, the idea of the moratorium was to defer repayment to ease the burden caused by COVID and lockdown so that business can manage working capital. The idea was not to waive off interest. The effort was that those who were affected by COVID and facing distress would get the benefit and those who were defaulters are not able to take benefit.
  • Banks and RBI were not in favour of waiver of interest. The RBI had on June 4 had said that lenders would lose Rs 2 lakh crore if interest was waived during the moratorium period.
  • The Centre and RBI informed the Supreme Court that the moratorium period on repayment of loans amid the COVID-19 pandemic was “extendable” by two years.

Will NDMA be required to step in?

The main grievance of the petitioners was that they were not given adequate relief and the National Disaster Management Authority (NDMA) under the Disaster Management Act (DMA) was not active to give relief. Solicitor General Tushar Mehta told the Apex court that the expert committee would come up with sector specific guidelines on 6th September. Expert panel would decide on the sector-wise relief to ease stress caused by the pandemic. He also added that, NDMA (National Disaster Management Authority) was not required to step in at this stage.

Interim Order passed by the SC

The interim order was passed, headed by Justices Ashok Bhushan and comprising R Subhash Reddy and MR Shah while hearing about the bunch of petitions demanding waiver of interest, or waiver of interest on interest on the suspended EMIs during moratorium period. The SC had previously said there was no merit in charging interest on interest. Senior Advocate Rajiv Dutta, who appeared for a petitioner, said that interest on interest was absolutely and prima facie wrong and they cannot charge it.

Referring to accounts not classified as NPA as on August 31, Justice Bhushan said that no account should be declared NPA for two months and the banks should not take action against borrowers which was coercive.

The moratorium scheme was conceptualized and implemented as a crisis-response measure. It was clearly stated that banks will be only deferring EMIs for the period, not waive the loan amount or interest amount. So, RBI and banks have valid argument to state that it is within the rights of banks to charge interest on the deferred EMIs from the borrower.

How can the borrower take up the additional burden of deferred EMIs and compound interest after the cut-off date while his financial situation has not improved at all? Won’t it add to his woes given that the loan after adjusting the moratorium deferral, will have bigger EMI or extended loan repayment tenure?

If interest waiver is allowed, banks will have to bear the cost. Capital-starved, NPA-ridden, state-run banks will suffer more as their promoter, the government, has no money to infuse in these lenders.  If interest waiver is not given, borrowers who have opted for six month moratorium will see their repayment burden escalating which could lead to more defaults.

Finance Minister Nirmala Sitharaman on Thursday asked bankers to roll out loan resolution schemes by September 15. COVID-19 related distress must not impact their assessment of borrowers’ creditworthiness, Sitharaman added.

Therefore, the Supreme Court passed an interim order saying that the accounts not declared as non-performing asset (NPA) as on 31st August shall not be declared as NPAs till further notice. The Apex Court will continue the hearing of the case on 10th September, 2020

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