With small borrowers receiving credits for the Centre’s compound interest waiver during the moratorium period, one set of petitioners who had been fighting a pitched battle on the loan moratorium case seems to have retired satisfied. Even as the Supreme Court put off the next hearing in the case to November 18, the main petitioner who had sought interest waiver for individual borrowers withdrew his plea. But for the investors who deploy their surpluses with banks, the pain from the pandemic continues to prolong as the reported numbers today hide more than they reveal. It is in this context that Reserve Bank of India’s appeal to the apex court that it was facing ‘great difficulties’ due to its interim order on non-performing asset (NPA) recognition, merits the court’s urgent attention.

Pending its decision on whether the six-month moratorium to bank borrowers from March 1 ought to be extended, the Supreme Court had in early September imposed a standstill on banks declaring such loans as NPAs even if they were in default on August 31. But this has had the effect of bank financial statements not reflecting the true and fair picture of their current state. With banks prevented from declaring loans overdue since the onset of Covid as NPAs, their reported numbers today significantly under-state their bad loan position. In the July-September quarter, the reported numbers of leading banks showed a moderation in Gross NPAs compared to April-June. But most banks admitted that they expect a regression as soon as the standstill was lifted. Without the benefit of the standstill, SBI, for instance, would have reported gross NPAs of ₹1.4 lakh crore instead of ₹1.25 lakh crore, with fresh slippages of ₹20,781 crore for the six months ended September 30, 2020. Apart from not being able to account for loans that have already gone bad, banks are also groping in the dark about how many of their overdue Special Mention Accounts will slip into default mode, once the moratorium is lifted.

In the absence of hard data, banks have been forced to take discretionary calls on loan loss provisions. Should these provisions fall short in the coming quarters, banks will take sharp profit hits which can reduce their capital buffers and raise the need for recapitalisation. Apart from obscuring a true and fair view of bank financials from investors, the under-reporting of NPAs does not augur well for the incipient economic recovery either. With capital adequacy worries hovering over them like a Damocles’ Sword, bankers are unlikely to shed their risk aversion anytime soon. Forced to rely mainly on guesswork to assess the investment-worthiness of banks, investors may be wary of parking money in deposits or bank shares. The previous NPA cycle from which the banking system was limping back prior to Covid also offered the lesson that when you sweep stressed loans under the carpet, they resurface with redoubled strength a few years later.

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