Between the Supreme Court and the government, the banks lose their freedom
Although the Supreme Court (SC) has recognized that it does not have the expertise to infringe on the jurisdiction of financial regulators and government, and that it would not want to get involved in complex business matters, the the fact that the judiciary decides on banking practices is worrying. After all, the Supreme Court ruled that lenders cannot charge “interest on interest” or compound interest on loans that were under moratorium between March and August of last year. In his opinion, the compound interest received during the repayment holiday is akin to penal interest; in this sense, he used his expertise to come to this conclusion and strayed into the executive realm.
It could be argued that banks should be allowed to charge compound interest. These are commercial and private transactions concluded by banks and borrowers, and a default constitutes a breach of contract, calling for some sanction. The government may have footed the bill of some Rs 6,500 crore for loans below Rs 2 crore when the court banned banks from charging compound interest, but that doesn’t mean the rules failed. been breached by borrowers. In fact, the government should not have intervened to help the borrowers; instead it could have capitalized the banks with the same funds and allowed the banks to decide which borrowers they should help.
Henceforth, the amounts billed for this title, regardless of the size of the loans, must either be repaid or adjusted to the borrower’s account. It will be a big blow to the banks if they bear this cost, although it is not a big blow since only about 15% of borrowers in this category have opted for the moratorium. However, it is not the amount or who pays that is important but the principle. Banks may not pay compound interest to depositors, but that doesn’t mean they can’t charge borrowers; the decision sets a bad precedent and embarrasses the banks. Borrowers now have the upper hand and will use this decision to get away with not paying compound interest even though there is no major pandemic situation. Even if they think the SC will not change its mind, the bankers should file an appeal; policy issues should be left to regulators and government.
The SC has done well in rejecting borrowers’ demands for an extended repayment holiday or any further relaxation of interest payments; nor did it allow the launch period for the resolution mechanism to extend beyond December 2020. The general moratorium was a bad idea; several bankers had expressed their concerns that so many borrowers were opting for the moratorium when they had the means to pay. More importantly, the SC has now enabled banks to classify non-performing assets (NPAs) as they should be; it had passed an interim order last September stating that accounts that were not overdue like August 31 could not be declared NPA until further orders. Asking banks not to do this was a terrible idea because not only did it make balance sheets less transparent, but it also prevented banks from taking action against borrowers.
Lenders have declared NPL pro forma and set aside capital by estimating potential losses, but nothing can replace the actual numbers. The court should credit the banks with the intelligence to deal with borrowers in the way they see fit. Bankers know their customers better than anyone and also know how to treat them. In addition, there is a competent regulatory body to suggest relaxations; overriding regulators is unwarranted and suggests that the judiciary thinks they don’t know their job.
The decision to ban banks from properly classifying NPAs was as bad as the government’s decision to suspend the Insolvency and Bankruptcy Code (IBC) for a year. Again, the government shouldn’t have stepped in and let the banks take the call instead. The point is, borrowers in this country have always been able to get away with going to court; since the laws were so weak, the banks were always on the losing side. Now that the IBC has proven to be an effective piece of legislation, the government should apply it without interruption; otherwise, the discipline of reimbursement will be tainted. After the pandemic, we might see a surge in insolvency; lenders may need to discount when these are sold to new owners, but capital cannot be locked in; it must be implemented and the assets must be used efficiently. The SC did well to close the back door on malicious developers trying to keep their businesses bankrupt when, in a recent verdict, it ruled that a person ineligible to file a resolution plan under the IBC cannot exercise recourse in article 230 of the Companies Act. and do so, thus making the IBC the overriding law. The government must now incorporate provisions to allow pre-packaged plans to facilitate resuscitation of ailing businesses. It would be a good way to celebrate five years of the IBC, by far the most important law developed for the corporate and banking sectors.