Moratorium accounts not to be declared as NPA until further notice: Order by Apex Court on September 03, 2020 & September 10, 2020

The apex court heard petition of borrowers on September 03, 2020 seeking interest waiver on loan moratorium granted previously by Reserve Bank of India (“RBI”). In the backdrop of COVID-19, banks had been permitted to a grant loan moratorium for initial 3 months in case of loans falling due between March 31, 2020 & May 31, 2020. RBI had then extended the same for a further period of 3 months until August 31, 2020. 

Bank’s stand: Rationale to grant moratorium was to lend relief to the borrowers encountering difficulties in wake of COVID-19. This was to ensure the distressed assets get some breathing space and are not burdened to manage their working capital. Granting interest waiver to all the sectors will entail that the prosperous derive benefit of the situation since certain industries such as pharma have witnessed significant boom amid COVID-19. 

Borrower’s stand: Moratorium and compound interest, penal interest cannot go hand in hand. Levying compound interest / penal interest shall defeat the sole purpose of moratorium as the burden only shifts / stands extended for a certain period.

The hearing was again scheduled on September 10, 2020 which has been deferred till September 28, 2020. The centre has been requested to roll out a concrete resolution i.e. probably sector-wise relief ensuring that distressed sectors reap the benefit. This will warrant that the most affected sectors derive the highest benefit.

Classification of account as NPA: As per prudential norms on Income Recognition and Asset Classification, a term loan is classified as non-performing asset (NPA) if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter. In light of this, considering the loans under moratorium has neither serviced loan nor interest component, classification of the same is still under dilemma i.e. whether the asset will slip into NPA on September 01, 2020. However, one view is that moratorium period does not include these 90 days and thus, period of 90 days must be calculated only post August 31, 2020 (post cessation of the extended moratorium period). The Apex Court upheld this for the time being and has ordered that “No accounts shall be declared as NPA until further notice”. It is worthwhile to note that this is applicable only to those loans / accounts which were not declared as NPA prior to August 31, 2020.

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