Ending an intense legal battle that dragged on for numerous months, the Supreme Court on Tuesday refused to alter the broad contours of the Covid-associated six-month loan moratorium package by accepting the government-RBI duo’s view that total interest relief for all classes of borrowers would jeopardise the banking program. It also declined to extend the six-month moratorium period that ended on August 31, maintaining in view the interest of depositors, banks and the bigger monetary sector.
The apex court also vacated a September 3, 2020, keep order that restrained banks from declaring NPAs loan accounts that have been not classified as NPAs prior to August 31, 2020. Economic policy choices have been very best left to the government, the court stated and stated that the immediate 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 produced amongst smaller and significant borrowers. Icra stated the move could price 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 price ~`6,500 crore to exchequer, the further price due to the most current ruling could be Rs 7,000-7,500 crore, the rating agency stated.
Still, the apex court ruling came as a relief to the banking business and the monetary sector as a complete, as blanket interest waiver or an extension of the relief period would have been a massive shock to it. Banks have been apprehensive about the SC’s stance, as it had produced a lot of observations in the course of the course of the hearing of the case, displaying its concern for the onerous interest burden on the borrowers hit by the financial turmoil, like the true estate and energy firms.
Banking stocks gained thanks to the verdict: Nifty Bank index closed at 34,184.4 on Tuesday, up 1.73% from the earlier close.
The government and RBI had regularly argued against a blanket waiver of interest on all the loans and advances offered to borrowers in the course of 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 absolutely wipe out more than half of the bank’s net worth which it has accumulated more than practically 65 years of its existence.
In the most current order, the SC restrained lenders from charging interest on interest/compound interest/penal interest in the course of the six-month loan moratorium period amongst March 1 to August 31, 2020.
Rejecting on a batch of petitions searching for extension of the loan moratorium period and other reliefs, the bench comprising justices Ashok Bhushan, R Subhash Reddy and MR Shah stated a total waiver of interest in the course of the moratorium period can’t be granted as banks have to spend interest to depositors, pensioners and so forth. 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 stated.
“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 stated.
“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 stated.
The government had in October final year granted waiver of interest on interest on loans up to `2 crore only so as to assistance person borrowers and medium, smaller and micro enterprises (MSMEs) in the course of the Covid outbreak. Besides MSMEs, the loan relief was meant for individual, housing, education, auto and customer durables loans, and credit card dues. However, the government had then ruled out any waiver for massive borrower, saying it would effect the depositors’ interest.
The SC noted that the Kamath Committee had gone into sector-distinct troubles and its suggestions had been substantially accepted by RBI in its September 7 circular that offered for separate threshold for 26 sectors, like energy, true estate and building. “…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, like true estate and energy firms, had argued that a common account must not have been declared NPA, when moratorium was in force. “Eligible borrowers’ accounts should continue to be classified as ‘standard”, Kapil Sibal stated, who appeared for realtors’ body Credai had contended, adding that the Kamath Committee was set up to regulate parameters amongst the borrowers and lenders, and “it has nothing to do with the Covid-19 disaster”.
On March 27 final year, RBI had announced a moratorium on loan instalments due amongst March 1 and May 31 and subsequently extended it by 3 months till August 31, 2020.
The SC ruling came on a batch of pleas filed by energy sector and true estate bodies, enterprise associations, and people demanding an extension of the moratorium beyond August 2020.
The Kamath Committee set up by the RBI has advisable monetary parameters for debt restructuring of 26 sectors impacted by Covid-19. For corporate accounts (other than MSMEs with up to `25 crore exposure) which have been up to 30 days overdue as on March 1, 2020, the framework of August 6, 2020, gives lenders and borrowers many approaches of making sure viability. At the exact same time, the prudential framework of June 2019 continues to be obtainable for situations not covered below the August 6 framework.