Banks finally get to tag bad loans as bad as SC lifts interim stay on asset classification

Supreme Court (Shutterstock)

The Supreme Court has finally lifted the interim stay on banks for classifying loans that were standard as on August 31 as NPAs (non-performing assets). Passing the judgment on the interest waiver case, the SC said, “Interim relief granted earlier not to declare the accounts  of   respective borrowers as NPA stands vacated. However, there shall be no order as to costs.”

With the SC lifting the stay, banks have now more clarity on asset classification. As per RBI norms, a loan account becomes NPA if there is no repayment till 90 days. It was on September 3, 2020, that the apex court put a stop on the NPA clock of Indian banks. The SC then ruled that banks cannot classify loan accounts as NPAs that were standard (not in default) as on August 31. This ruling came as a blessing to the borrowers but a pain for the banking system.

So far, banks have been treating bad loan accounts in two different ways since the SC order. With respect to the accounting part, banks treat these bad loans as bad loans and show proforma gross NPAs while announcing their quarterly financial results. But, when it comes to the banks’ relation with the defaulted customer, the loan continues to be treated as standard.

Most banks have been reporting higher proforma NPA number compared with the reported NPA figures.

A relief for banks

Today’s SC ruling is a relief for the banking sector as a whole since banks have been unable to classify accounts as per their actual performance since September last year. This created some amount of complication in calculations and uncertainty.

“Overall relief for banks as no further dragging of the issue from legal point of view,” said Sidhharth Purohit, senior analyst at SMC Global securities.

No big impact on banks

However, since banks have been already calculating proforma NPAs and making additional provisions, there will be no major impact on banks with the SC lifting the interim stay, analysts said.

"The Supreme court judgement is positive for the banking sector as they have ruled out a complete waiver of interest. The Court has also ruled that banks cannot charge interest-on-interest on the loan amount during the moratorium period," said Jyoti Roy, Deputy Vice President, Research at Angel Broking.

“Most bank had already adjusted the amount so incremental impact would be negligible,” said Roy.

Repeated pleas

Already, both the Reserve Bank of India and the banking industry have raised the problem caused by the SC order. In October, 2020, the RBI, in a fling to the SC, said that a failure to lift the interim stay could undermine the central bank’s regulatory mandate.

Around the same time, the Indian banks association (IBA), too, raised a similar demand saying the stay has made banks helpless to do proper monitoring of the asset quality.

Later, in December, 2020, the finance ministry also said it was finding it difficult to make a proper assessment of the recapitalisation needs of the PSU banks due to the SC stay.