India’s Supreme Court allowed lenders to resume classifying delinquent debt as bad loans, reversing a ruling that delayed disclosure of soured credit in an economy already saddled with stressed assets.
A three-judge panel headed by Justice Ashok Bhushan delivered the verdict on Tuesday, supporting a request from the federal government and central bank, which had sought to overturn a September order that barred the categorization of loans as non-performing.
The order will come as a relief for investors who have been unable to gauge the impact of the pandemic on asset quality of banks. Regulators had allowed a six-month relaxation on classifying bad loans that was due to expire in August before the court extended it. The Reserve Bank of India expects that roughly 13% of outstanding loans at local lenders could turn sour by September, which would be the highest level since 1999.
The key index of Indian bank shares gained 0.8% after the decision, compared with a 0.4% rise for the benchmark gauge.
Read about the actual bad loan numbers without relaxation
“This will bolster banks’ loan recovery efforts as defaulting borrowers will now be tagged appropriately,” Karthik Srinivasan, senior vice-president and group head of financial sector ratings at ICRA Ltd., the local arm of Moody‘s Investors Service, said ahead of the ruling. “It will also help investors to be more clear about the extent of bad loans, which was otherwise being reported under proforma or potential bad loans.”
The ruling also comes about a week before Indian companies can resume filing for bankruptcy, a process that has been frozen over the past year as part of pandemic-relief measures.
Interest Waived
The court also ordered that interest accumulated during last year’s loan holiday would be waived for all borrowers, which analysts estimate could cost as much as $2 billion. The government had previously said it would bear the 60 billion rupee cost for smaller borrowers, but it’s not yet clear who will take on the additional expenditure.
Prime Minister Narendra Modi’s administration was previously bearing the subsidies for loans up to 20 million rupees. The court also said the government couldn’t justify the rationale for this cap and ordered banks to either refund or adjust against future payments the amount charged as “interest on interest” for all debt during the six-month moratorium that ended in August.
Still, the court agreed with the government and RBI’s request to not extend the moratorium, which was part of the authorities’ pandemic-relief measures.
“The waiver of compounded interest for all borrowers, while not extending the moratorium, is an equitable judgment as it helps people hit by the pandemic while preventing moral hazard risks,” said Mahesh Misra, chief executive officer at India Mortgage Guarantee Corp.
Read how billions of dollars are at stake for India Banks in 2021 Court Cases
The government told the court that waiving compounded interest for all borrowers “would result in very substantial and significant financial burden” and that banks would have to pass on the financial impact to depositors if such a decision was implemented.
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March 23, 2021 at 02:32PM
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Supreme Court Allows Indian Lenders to Resume Marking Bad Debt - Bloomberg
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