Lift order restraining banks from classifying loans as NPAs as it could impact banking system: RBI to SC

By: |
October 11, 2020 10:57 AM

Earlier this year, the central bank allowed lenders to freeze loan repayments through Aug. 31 to limit the impact of the coronavirus pandemic on borrowers. It also gave lenders power to restructure certain loans.

A moratorium beyond the six months can erode credit discipline and increase the risks of delinquencies, RBI said.

India’s central bank and the federal government have urged the nation’s Supreme Court to reject pleas by borrowers to extend a loan repayment holiday, according to people familiar with the filing.

The Reserve Bank of India and the government filed their written views on Friday following an order by the court, saying the measures announced so far to increase liquidity and lower borrowing costs are having a positive impact on the economy, the people said, asking not to be identified because the filings aren’t public.

A RBI spokesperson didn’t immediately respond to a message seeking comment. Finance Ministry spokesman Rajesh Malhotra declined to comment, saying the matter is under consideration by the court.

Earlier this year, the central bank allowed lenders to freeze loan repayments through Aug. 31 to limit the impact of the coronavirus pandemic on borrowers. It also gave lenders power to restructure certain loans.

The measures announced by the RBI after the pandemic have assured 11.1 trillion rupees ($152 billion) of liquidity, equivalent to 5.5% of gross domestic product, while lower borrowing costs have led to a record 3.2 trillion rupees in primary issuance of corporate bonds between April and August, the central bank said in the filing.

Prime Minister Narendra Modi’s government has also offered additional support by deciding to pay the “interest on interest” on loans of as much as 20 million rupees for the duration of the RBI-authorized repayment holiday. The government said it will seek approval from the cabinet and parliament for the “huge” additional expenditure that will be incurred.

Also read: Agri-commodities export jumps 43% to Rs 53,626 cr during April-September 2020 from year-ago period

India’s financial system entered the pandemic already weakened by a mountain of bad loans at its banks and a two-year liquidity crisis at so-called shadow banks. Business activity collapsed after Modi’s government instituted some of the world’s strictest shelter-at-home rules in March, setting the economy on course for its first contraction in more than four decades this year.

The RBI also requested the court to lift the order restraining banks from classifying loans as non-performing assets, saying that could have a huge adverse impact on the banking system as it halts the recognition and provisioning for bad loans.

A moratorium beyond the six months can erode credit discipline and increase the risks of delinquencies, the RBI said. That may hurt credit creation and small borrowers may eventually end up bearing the brunt as their access to formal lending channels is critically dependent on the credit culture, the central bank said.

Sector-specific considerations for the resolution of large loans would address the deeper cash flow problems of businesses rather than a continuation of the temporary moratorium, the RBI said.

The filing was in response to the court’s order seeking the RBI’s views on some borrowers — including industry groups for real estate and power producers — who seeking a waiver on compounded interest and an extension of the repayment holiday.

Do you know What is Cash Reserve Ratio (CRR), Finance Bill, Fiscal Policy in India, Expenditure Budget, Customs Duty? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Narendra Modi to interact with street vendors benefitted from PM SVANidhi scheme in UP
2Carpe diem: Chance for India to boost exports
3Surprise floods: Damage to crop to hit farm returns