Supreme Court extends date for banks to recognise Covid-shock bad loans

The Supreme Court on Thursday extended the relaxation of rules over the classification of non-performing loans until further notice, delaying the disclosure of how much bad debt banks actually hold.

The three-judge bench headed by Justice Ashok Bhushan on Thursday gave the government two weeks to come up with relief measures for virus-hit businesses and said such a decision had to be put before the court for consideration. It also reiterated that banks must not classify as bad any loans that were performing at the end of August until further order.

The hearing comes after a group of borrowers petitioned to stop banks from collecting interest during the loan moratorium that ended in August. The central bank had allowed lenders to excuse cash-strapped borrowers from paying instalments until August 31 and lenders to collect interest for the period the repayment was due once the moratorium ended.

After the moratorium ended, it was replaced by a longer-term loan restructuring program for up to two years. The central bank also set strict eligibility criteria for borrowers who had been hit hard by the economic fallout of the pandemic.

A delay in recognising problem loans means that bad debt could fester for longer in a nation that contracted 23.9 per cent in the June quarter, the most among the world’s largest economies. That will add to the pile of India’s non-performing debt, which is already the highest among major markets globally.

While borrowers accounting for more than a third of the outstanding loans sought a repayment holiday when the program was announced in late March, many did not go for an extension to the moratorium in May after realising the higher costs. That meant that the percentage of borrowers opting for a second loan holiday dropped to 18 per cent in June, according to estimates by Jefferies Financial Group Inc.