The Supreme Court on Tuesday permitted the waiver of penal interest for all borrower who opted for a loan moratorium between April 1 and August 31 last year.

However, it refused to concede a plea for an extension of the moratorium scheme beyond August 31 and rejected the prayer for sector-specific reliefs for stressed small businesses, power producers and real estate companies.

A three-member bench of Justices Ashok Bhushan, R. Subhash Reddy and M.R. Shah also vacated its earlier interim order that said the accounts of defaulters after August 31 2020 shall not be declared as non-performing assets (NPAs).

While extending the penal interest waivers to all borrowers till August 31, 2020 and not just to those with loans up to Rs 2 crore, the court said any amount charged shall be refunded, credited or adjusted.

The apex court refused to interfere with the Centre’s and the Reserve Bank of India (RBI's) decision to not extend the loan moratorium beyond August 31 last year, saying it is a policy decision. The apex court said there could be no judicial review of the Centre's policy decisions unless these were deemed to be malafide or arbitrary.

The apex court turned down the plea of the petitioners to offer sector-specific relief. It said it cannot interfere with the government’s decision to fix priorities for relief during the pandemic which has affected all across the country .

“Every sector might have suffered differently and therefore it will not be possible to provide sector specific/sector­wise 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.”

Further, the bench clarified that the RBI circular of March 27 last year relating to the loan moratorium shall be applicable to all banks, non­banking financial companies, housing finance companies and other financial institutions “compulsorily and mandatorily”. The clarification comes in the backdrop of doubts that the moratorium and other benefits announced by the RBI was applicable only to scheduled banks and not NBFCs.

Bank impact

Banks could see their bad loans rise Rs 1.3 lakh crore in the fourth quarter of this fiscal with the Supreme Court lifting the stay on the classification of defaults as non-performing assets (NPAs).

Analysts said the lenders have already made adequate provisions and therefore it will not lead to any drastic impact on their bottomlines. Moreover, they can also begin resolution of such stressed assets.
On the refund of interest penalty, the analysts said the key question was whether the government would compensate the banks.

“As per our estimates, the compounded interest (waiver of penal interest) for six month of moratorium across all lenders is estimated at Rs 13,500-14,000 crore. The government of India had already announced relief for borrowers having borrowings upto Rs 2 crore which was estimated to cost around Rs 6,500 crore to the exchequer,” Anil Gupta, vice-president – financial sector ratings, Icra, said.

“With the announcement of waiver for all borrowers, the additional relief of around Rs 7,000-7,500 crore will need to be provided to borrowers,” he said.