Moratorium on loan repayment shouldn't be at the cost of economic recovery

The Supreme Court on Thursday passed interim orders regarding the general lending moratorium, which was part of the pandemic relief package. The court was hearing a case lodged by various trade associations and organisations that claim to represent borrowers and sought an extension of the moratorium and interest payments waiver. The Reserve Bank of India had permitted banks to grant a moratorium on term loans to help soften the economic blow of the outbreak. The moratorium, which was initially for a period of three months till May 31, was later extended to August 31. The uptake of the moratorium was variable; many companies and businesses that could scrape up the money to pay instalments did so even as revenue collapsed, since the interest on their loans continued to accrue. It is this interest that some other borrowers have moved court to try and prevent the collection of. Their legal argument was that, since a national disaster had been declared, they should have been provided relief under the National Disaster Management Act, which empowered the Union government to do so.

The court’s interim orders do not disrupt matters unduly. They merely state that the accounts that were not non-performing assets (NPAs) on August 31 this year should not be declared as such until further orders. In other words, the court directed the banks to hold off on the NPA process till further information is in. They appear to have been thinking of the fact that the exact sector-specific loan restructuring norms and guidelines are still awaited from the K V Kamath-led committee. The committee, which will suggest recommendations on the financial parameters to be considered in the restructuring of loans impacted by the Covid 19 pandemic, is expected to submit its report in the next few days.

The remarks by government counsel that it is up to the banks and the regulator to decide how to simultaneously assist borrowers and preserve the integrity of the banking system are persuasive. Banks in any case are reluctant to add to their pile of NPAs, so they are more than likely to take a benign view. If anything, the regulator will eventually have to insist on continuing the important asset quality clean-up, which has been interrupted by the pandemic. Hopefully, the court will recognise that the legal system should not undermine the financial system. Banks that cannot make decisions about recovering loans will not be able to function. Certainly, it is highly doubtful that the Disaster Management Act’s writers imagined that their legislation would require the legal takeover of the banking system. It is true that the question about what interest is paid and whether it is compounded and so on, is larger than any one loan or even one bank. But that is the proper place for a regulator. There is no question that there is widespread distress, but a broad-based recovery will depend upon banking health and regulatory effectiveness. Imposing additional burden on the banking system, which anyway is expected to witness a surge in bad loans, will undermine the chances of economic recovery.