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Photo: Mint
Photo: Mint

RBI seeks vacation of SC stay on classification of NPA accounts

  • Reserve Bank warns SC's stay order will have huge implications for the banking system if it is not lifted immediately
  • Centre rules out further relief measures under loan moratorium scheme in Supreme Court affidavit

The Reserve Bank of India (RBI) has informed the Supreme Court that its order staying the classification of non-performing asset (NPA) accounts will have huge implications for the banking system if it is not lifted immediately.

The central bank also said that the ruling undermines its regulatory mandate.

RBI had, in March, allowed a three-month moratorium on equated monthly instalments (EMIs) of term and other loans that were due between 1 March and 31 May. The moratorium was later extended till 31 August.

The top court, in an interim ruling on 3 September, had ordered a stay on the classification of NPAs—if not declared as such by 31 August—till further orders.

Meanwhile, the Centre has, in response to a batch of petitions, filed an affidavit in the top court ruling out further relief measures under the loan moratorium scheme.

It said a balanced view of the interests of depositors, borrowers, real estate sector entities and banks, in addition to the financial stability and economic growth of the country, has been taken taken into account while deciding its policy.

In response to a plea on waiving interest/interest on interest, the government said such a move will entail significant economic costs that cannot be absorbed by banks without a serious dent in their financials, which, in turn, will have huge implications for depositors and broader financial stability.

The Centre said it had submitted an affidavit on 2 October in which it had informed the top court about its decision to bear the cost of ‘interest on interest’ for MSME loans and personal loans up to 2 crore .

In response to a plea seeking extension of moratorium beyond 31 August, the government said the moratorium was part of an immediate regulatory response and that any extension "may result in vitiating the overall credit discipline, which will have a debilitating impact on the process of credit creation in the economy".

The Centre said it had on 6 August announced a resolution framework for covid-related stress that allows lenders and borrowers to resolve issues depending on the specific requirements of each sector. The framework, inter alia, permits extension of the moratorium by a maximum of two years, the government said.

On Friday, the apex court had asked the Centre and RBI to bring on record the report of an expert panel headed by former New Development Bank and ICICI Bank chief K.V. Kamath.

The panel was constituted by RBI to recommend the financial parameters to be considered for a one-time restructuring of loans affected by the pandemic. The panel had recommended financial ratios for 26 sectors, including power, construction and automobile manufacturing, which could be considered by banks.

According to the report submitted to RBI last month, lenders must consider five parameters: total outstanding liabilities/adjusted tangible net worth, total debt/Ebitda, current ratio, debt service coverage ratio, and average debt service coverage ratio.

“Wherever the committee felt certain ratios were not relevant or not applicable based on the specific nature of the sector, the committee recommended a different treatment; for eg., aviation, automobile manufacturing, roads and whole sale trading, which has also been accepted by RBI," the affidavit said.

As against what the petitioner has said, the Kamath panel has given sufficient leeway to accommodate the impact of covid while stipulating specific ratios, the Centre added.

“The ratios prescribed are intended as floors or ceilings, as the case may be, but the resolution plans are required to take into account the pre-covid operating and financial performance of the borrower and the impact of covid on its operating and financial performance at the time of finalizing the resolution plan, to assess the cashflows in subsequent years, while stipulating appropriate ratios in each case," the affidavit said.

On the plea seeking to make all accounts eligible under framework, the Centre said its decision to allow only those accounts classified as ‘Standard’ but which were not overdue for more than 30 days as on 1 March 2020 "is based on intelligible differentia, and has a rational nexus".

The Centre said it would be wrong to equate the accounts paying on time with accounts paying with a considerable delay.

“The liquidity measures announced by RBI have assured liquidity of the order of 11.1 lakh crore, or 5.5% of GDP," the government said, adding, “The transmission of policy rate to bank lending rates has improved further, with the weighted average lending rate (WALR) on fresh rupee loans sanctioned by banks declining by 162 basis points in February 2019-August 2020, of which 91 basis points transmission was seen in March- August 2020. As of August 2020, the WALR for banking sector on all fresh rupee loans sanctioned was 8.35%."

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