Don't declare accounts NPA till further orders, says Supreme Court

The Bench said while the RBI’s expertise in regulating the financial sector was not in question, not everything could be left to banks, and more solutions were needed to alleviate the hardships of small businesses and borrowers
In a respite to stressed borrowers, the Supreme Court on Thursday directed that accounts not declared non-performing assets (NPAs) as of August 31 should not be classified as such until further orders.

A three-judge Bench headed by Justice Ashok Bhushan was hearing a batch of petitions challenging the levy of interest on loans during the moratorium period. The Bench will hear the case next on September 10. 

The apex court’s directive came while noting the submissions of senior lawyer Harish Salve, who appeared for a banks’ association and said that “no account shall become NPA at least for a period of two months”.

“In view of the above, the accounts which were not declared NPA till August 31, 2020, shall not be declared NPA till further orders,” said the Bench, also comprising Justices R S Reddy and M R Shah.
A plea filed by Agra resident Gajendra Sharma has sought a direction to declare the portion of the Reserve Bank of India’s (RBI’s) March 27 notification as something beyond the regulator’s legal power or authority, to the extent that it charges interest on the loan amount during the moratorium period. A number of sectoral bodies have joined cause with the original petition, demanding waiver of interest, or waiver of interest on interest on the suspended monthly instalments. 

The court’s observations on Thursday came two days after the Centre and the RBI informed it that the moratorium on repayment of loans could be extendable up to two years under certain conditions, and that sectors most distressed by the economic slowdown were being identified.

The Bench said while the RBI’s expertise in regulating the financial sector was not in question, not everything could be left to banks, and more solutions were needed to alleviate the hardships of small businesses and borrowers.

“The solution to the broader issues has to be delivered by the government and the RBI. Not everything can be left to the banks,” the bench observed.

The Centre, on its part, said the RBI’s August 6 notification was the “beginning of a solution”, with aim being to provide relief for genuine defaulters due to the Covid-19 pandemic and the lockdown, and not wilful defaulters. It pleaded with the Bench that any step taken should not harm banks and the financial system.

Solicitor General Tushar Mehta, who appeared for the Centre and the RBI, said the banking sector was the “backbone of the economy” and “every sector” and “every economy” was under stress due to the pandemic. Mehta said it was an accepted position worldwide that waiving interest was not a good option for the revival of economy. While referring to the grievance raised by the petitioners, the Bench said, “We are concerned with interest on the interest”.

The RBI had on August 6 provided a framework for lenders to implement resolution plans in respect of eligible loans. The resolution plan might involve any action, including the regularisation of accounts by restructuring. Besides concessions in the rate of interest, the framework under the RBI's circulars of August 6 also permitted lenders to allow a moratorium of up to two years.

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