The Reserve Bank of India (RBI) has prayed before the Supreme Court to lift the stay on classification of loan account as NPA (non-performing assets).

At the same time the Centre has made it clear that no further relief is possible beyond waiver of interest-on-interest for certain categories of loan account having borrowing up to ₹2 crore.

These are part of the additional affidavits by the RBI and government filed before the Supreme Court in a matter related with loan moratorium. The matter will come up for hearing on Tuesday (October 13).

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“It is humbly submitted that this Hon’ble court had given an across-the-board stay on classification of any account as NPA till further orders. If the stay is not lifted immediately, it shall have huge implications for the banking system, apart from undermining the regulatory mandate of the Reserve Bank of India,” the central bank said in consolidated counter affidavit filed before the Court.

In its order dated September 3, the Court had said, “The accounts which were not declared NPA till August 31, 2020 shall not be declared NPA till further orders.”

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‘Interest-on-interest’

It may be noted that the six-month loan moratorium period ended on August 31 under which borrowers were given option to defer EMI (equated monthly instalment). However, deferment came with a cost as banks made it clear that interest accrued during six months period will be added to the principal amount and then interest will be charged on the expanded base. This is termed as ‘interest-on-interest.’

A petition was filed before the Supreme Court with a plea for waiver of interest during moratorium period. In its response, the Centre filed an affidavit earlier this month and said complete waiver is not possible.

However, it informed the Court about its decision about waiver with regard to interest-on-interest up to ₹2 crore in eight categories (home loan, personal loan, credit card dues, MSME etc). However, on October 5, the Court asked the Centre and RBI to file counter affidavits in other writ petitions where certain additional issues such as classification of NPA, relief for other sectors have been raised.

RBI counter affidavit

In its consolidated counter affidavit, the RBI quoted its guidelines on NOA and said these are aimed at reflecting true and fair position of the accounts of banks so that the financial assets (which are public assets) will be accurately reflected in the books of accounts of the lenders.

The classification of a loan account as NPA, based on the record of recovery, actually enables the lenders to follow the regulatory guidelines with regard to income recognition and provisioning. The central bank argued that relief sought by different petitioner on the issue of NPA do not deserve consideration.

The trade-offs

Every regulatory forbearance has its trade-offs in terms of adverse incentives and unintended consequences.

The RBI has exercised its wisdom in issuing binding guidelines to lending institutions on how to differentiate the risks arising from borrowers with pre-existing financial difficulties from those which were performing well but had been impacted by the pandemic.

“Reserve Bank of India has taken a balanced view, taking into account the interest of the depositors, borrowers, real sector entities and banks. Financial stability and economic growth of the country were also kept in mind while arriving at its policy decisions by the Reserve Bank.

“All the issues that were advanced by the petitioners have been adequately addressed. There is no scope for further grievance for the petitioners,” it said while giving details about the Kamath Committee’s recommendations and other regulatory measures.

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