The Supreme Court of India has ordered a compound interest waiver for all borrowers who benefited from a credit moratorium under the central bank’s Covid-related relief effort last year.
The Supreme Court found no justification for extending the waiver of compound interest or interest only for loans of up to 2 billion rupees, according to a judgment issued on Tuesday. During the hearing of the case, the central government agreed to cover the interest costs on small ticket credits of up to Rs.2 billion each in eight categories of borrowers. The total cost borne by the government was then estimated at 6,500 rupees.
Now the Supreme Court has ruled that compound interest is to be lifted for all borrowers taking advantage of a moratorium, regardless of the size of the loan or the category, and has ordered that the amounts already collected as interest on interest for the moratorium period from the Banks need to be adjusted. ICRA estimates that the extended waiver will cost an additional Rs 7,000-7,500 crore. “Our estimates put the compound interest on a six-month moratorium on all lenders at Rs 13,500 to Rs 14,000,” said Anil Gupta, Vice President – Financial Sector Ratings, ICRA Ltd.
The Supreme Court also lifted banks’ suspension of bad asset classifications. Pre-granted injunction not to declare any accounts of the respective borrowers, as the NPA is free, according to the bank’s order, which consists of Judge MR Shah, Judge Ashok Bhushan and Judge R Subhash.
However, the Apex court dismissed other pleas in the case, including a total waiver of all interest, an extension of the duration of the credit moratorium, and pleas instructing the Reserve Bank of India and the government to provide further relief to some specific sectoral relief.
” In offering the grant packages, there is also a need to consider and take into account the financial constraints and / or the financial burden on the government, which can be taken into account by the experts, and the government and the courts do not have the expertise to assess the financial burden Said the top court order
In 2020, the RBI had allowed banks to grant a moratorium on fixed-term loans to ease the economic blow of the pandemic. The moratorium, which initially lasted three months until May 31, was later extended to August 31.
The case before the Supreme Court began with a public interest lawsuit by Gajendra Sharma, a borrower, who sought relief on the interest payable during the moratorium period. The discussion about the extent of the relief before the Supreme Court was gradually limited to a waiver of the compound interest component that was applicable during the moratorium.
In the course of those hearings, the Supreme Court issued a restraining order in September, stating that accounts that were not in default as of August 31 would not be declared NPA until further orders.
In October 2020, the government notified the Supreme Court that it had decided to waive compound interest on loans up to Rs.2 billion for eight categories of borrowers, mostly private and small businesses. Covid-affected sectors like power, hotels and others sought further specific relief from the court.
However, the RBI informed the court that the banks would decide on such relief by restructuring the loans as part of a special Covid dispensation. This restructuring window closed on December 31st.
However, the whereabouts of the declaration of non-performance of the loan account remained in force. However, banks have released pro forma numbers for the quarters ending September and December 2020 to keep investors informed of the stress on balance sheets.