Loan Moratorium: SC Breather for Distressed Borrowers

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Says accounts not declared NPA as on Aug 31 not to be declared NPA for further two months

New Delhi: The Supreme Court of India on Thursday passed an interim order saying that the accounts not declared as non-performing asset (NPA) as on 31 August shall not be declared as NPAs till further notice.

“Accounts not declared NPA as on August 31 not to be declared NPA for two months,” the court directed. It said it will hear the matter again on September 10.

Considering the economic impact of the lockdown imposed to fight the coronavirus crisis, the RBI had on March 27 said that banks would be allowed to grant a moratorium of three months on payment of all installments due between March 1 and May 31. On May 23, it said that banks can extend the moratorium until August 31. However, the RBI had said it would be imprudent to go for a forced waiver of interest, risking the financial viability of the banks it was mandated to regulate and putting the interests of the depositors in jeopardy.

The case was heard by a bench comprising Justices Ashok Bhushan, R Subhash Reddy and MR Shah. Bhushan said in his order that banks should take no action against borrowers that is coercive.

Solicitor General Tushar Mehta, representing the Centre and the RBI, said that the steps needed to be taken by the authorities had to take note of three key points: the reduction of immediate pressure of payment of installments, the revival of all possible sectors and the restructuring of stressed assets.

Mehta added that the idea of a loan moratorium was to defer repayment with the aim of easing the financial burden caused by the coronavirus and not to waive-off any interest. “The effort is that those who are affected by Covid and facing distress get the benefit and those who are defaulters are not able to take benefit,” he told the top court. The solicitor general added that the coronavirus had a different impact on every sector.

Bhushan told Mehta that the main grievance of the petitioners was that they had not been given the adequate relief amid the coronavirus crisis. “The main grievance of the petitioners is that they have not been given the adequate relief and the National Disaster Management Act and the Disaster Management Act has not been active to give relief,” Bhushan noted.

Mehta told the court that in a circular on August 6, the RBI has detailed a plan on restructuring of loans, which takes care of the concerns raised by the petitioners. He added that an expert committee will come up with sector-specific guidelines on September 6.

On Wednesday, Mehta had argued that a number of banks were dealing with various loans and borrowers, reported The Hindu. The push is to revive the economy and the sectors, he said, adding that most of the Indian economy runs on small enterprises.

“We cannot look at recovering the economy by ignoring the banking sector, so that they do not become financially unstable,” Mehta said, according to Live Law. “This is indeed a difficult way forward.”

The bench was hearing petitions challenging the interest component of the moratorium circular.

On Wednesday, advocate Rajiv Dutta, appearing for petitioner Gajendra Sharma who had taken a loan from a bank, told the bench of Justices Ashok Bhushan, R Subhash Reddy and MR Shah that the interest on loan would continue to accrue during the moratorium period and would be added to the principal, Bar and Bench reported.

Advocates also appeared for CREDAI, an association of real estate developers, its Maharashtra wing, the Association of Power Producers and the Shopping Centres Association of India. The petitioners argued for relief from repayment of loans with interest under the Disaster Management Act.

Advocate Ranjit Kumar, representing the Shopping Centres Association of India, said that malls and shopping centres have not done good business during the lockdown, unlike the pharmaceutical, FMCG and information technology sectors. He added that after August 31, all unpaid loans became non-performing assets by default, as the moratorium period ended.

Advocate KV Vishwanathan, appearing for CREDAI, said that the doctrine of proportionality should be used in the matter. He asked whether the court would ask banks to forego their profits in the light of the extraordinary situation created by the pandemic. Vishwanathan said the RBI’s March 27 circular postponed the burden on the customer, but does not ease it at all.

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