Supreme Court rules against extension of moratorium on bank loan repayments

By Suchitra Mohanty and Swati Bhat

NEW DELHI/MUMBAI (Reuters) – India’s top court on Tuesday rejected an attempt to extend a six-month moratorium on loan repayments to banks, but ruled no borrower could be charged the extra interest incurred on loans during this period, which ended in August last year.

The judgment brought relief to banking investors and India’s Nifty PSU banking index, which tracks state-owned banks, rose 3.93% while the Nifty Bank index rose 2.07% after the verdict.

The Reserve Bank of India (RBI) had allowed banks to offer a repayment moratorium to borrowers for six months from March last year after a government-imposed COVID-19 lockdown.

However, borrowers said the additional interest accrued during the moratorium that would be charged after repayments restarted would increase the burden on them.

India’s top court rejected requests to extend the moratorium and said the government and central bank rather than the judiciary decide economic policy based on expert opinion.

Justice MR Shah said the problems facing the borrowers had been solved by measures taken by the RBI and the central government.

But Shah added that the court ruled that “there should be no interest on interest”.

Indian banks had hoped borrowers would not get a further respite beyond waiving compound interest for loans up to 20 million Indian rupees ($276,000) for six months, the interest charge that the government had agreed to bear to compensate the banks.

The court, however, said that all borrowers, regardless of the size or category of the loan, should obtain a waiver and be reimbursed interest, if they had already been charged, in one form or another by the banks.

“We had estimated that the total impact across all loans could be around Rs 150 billion,” Suresh Ganapathy, research analyst at Macquarie, wrote in a note.

The government, if it decides to compensate banks for all categories and sizes of loans as instructed by the Supreme Court and not just those up to Rs 20 million, will now have to pay an additional Rs 100 billion, he added.


India’s top court also lifted an earlier interim stay that had prevented banks from acknowledging bad debts.

Indian banks are already saddled with bad debts of more than $120 billion and this burden is expected to increase further due to the economic stress caused by the pandemic.

After an initial court filing, in September last year, the court ordered banks not to declare accounts that were standard at the end of August as non-performing assets, i.e. for a period of two months, i.e. until further notice.

The RBI has warned that gross non-performing assets, which represented around 8.5% of total assets in March 2020, could rise to around 15% in a severe stress scenario.

($1 = 72.3350 rupees)

(Additional reporting by Nupur Anand; Editing by Christopher Cushing; Editing by Kenneth Maxwell)

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