Supreme Court lifts blanket ban on NPA classification

The Supreme Court on Tuesday said the interim relief granted earlier to not declare the accounts of respective borrowers as non-performing assets stands vacated, ending the blanket ban on classification of non-performing assets (NPAs).

“However, there shall be no order as to costs,” the order by the top court said.

In September last year, the Supreme Court had directed that accounts not declared NPAs as of August 31 should not be classified as such until further orders. This has since then put an effective ban on classification of bad loans.

The Supreme Court has also ordered waiver of compound interest for all borrowers who availed the loan moratorium announced amid the Covid-19 pandemic. Any amount already charged shall be refunded, credited or adjusted, the top court said. The government in October 2020 had announced a scheme for waiver of compound interest during moratorium for small ticket loans up to Rs 2 crore. This had cost Rs 5,500 crore to the government.

The court observed that there was no rationale in the Centre's policy to limit the benefit of waiver of interest on interest or compound interest only to certain loan categories.

Anil Gupta, vice president-financial sector ratings at Icra, said the government will have to spend an additional Rs 8,000-8,500 crore to provide compound interest waiver to borrowers with loans above Rs 2 crore. This would be over and above Rs 5,500 crore provided for interest on interest waiver for loans up to Rs 2 crore, he added

“Charging interest on interest would have eventually diluted the relief granted by the Reserve Bank of India to ailing borrowers and they may perhaps be worse off than pre-Covid stage, said Siddharth Srivastava, a partner at Khaitan & Co.

The top court refused to interfere with the Centre's and Reserve Bank of India (RBI's) decision to not extend the loan moratorium beyond August 31 last year, saying it is a policy decision.

The court cannot do judicial review of the Centre's financial policy decision unless it is malafide and arbitrary.

The apex court said it cannot interfere with the government's decision to fix priorities for relief during the pandemic which has affected all across the country.

The Supreme Court bench of Justices Ashok Bhushan, R Subhash Reddy and MR Shah said this in its verdict on a batch of pleas filed by various trade associations, including from real estate and power sectors, seeking extension of the loan moratorium period and other reliefs in view of the pandemic.