On March 23, the Supreme Court brought a satisfactory closure to the plea that interest on loans for the six month moratorium period be waived. The apex court took two broad decisions: all loans, and not just loans below ₹2 crore, will be freed from paying compound interest for the six-month moratorium period that ended on August 31; and that it will not instruct the government to extend the moratorium period. In doing so, it has sought to strike a middle ground of providing some relief to the borrowers without posing a strain to the finances of banks. The income foregone by the banks is estimated at about ₹14,500 crore (to be footed by the Centre), which is nowhere near the ₹6-lakh crore that would have been lost if interest on all loans for the six-month period had been waived, as urged by the petitioners. The court has rightly observed that banks cannot be denied interest income as they need to meet their obligations towards depositors. Indeed, the edifice of banking and finance would come apart if interest waivers are normalised through judicial or executive intervention (and this is precisely the trouble with all loan waivers).
To relax the terms and conditions under exceptional circumstances is one thing, and this is what the waiver of compound interest now amounts to, but to forgo all interest is quite another. The apex court has also underscored an important aspect of its rulings on matters of economy and finance: that it would rather not intervene in matters of policy unless they raise Constitutional questions (such as the status of spectrum as a national resource) or matters of natural justice. Therefore, the question of duration of NPA moratorium did not find favour with the court, whereas the waiver of compound interest arguably qualifies as a force majeure remedy; this is even as banks feel equally entitled to charge it as opportunity cost of money.
Banks will now be in a clearer position with respect to the NPAs in their books. With moratoriums no longer in the scene as a measure of post-Covid relief, the onus to give flagging concerns a chance would depend considerably on the Kamath panel formula suggested in September last. So far, the restructuring scheme has found few takers. But this could also be because borrowers were awaiting the SC verdict on the duration of moratorium. If the poor response persists amidst loan stress, the issue of restructuring may require a relook. While measures have been taken by the RBI since May 2020 to prevent a liquidity issue from turning into a solvency problem, the challenges awaiting the IBC, which has once again come into force, are anyone’s guess. A turnaround in credit would now require an improvement in macro conditions, besides a resolution of the ‘twin balance sheets’ of banks and businesses.