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The Supreme Court’s refusal either to extend RBI’s six month moratorium on loans being classified as non-performing or to grant a complete waiver of interest during the moratorium period is welcome. By upholding RBI’s stand against a blanket extension of the loan moratorium it had offered to businesses hurt by the pandemic-induced lockdown, the SC has averted a conflict with the regulator.
Quite sensibly, it has recognised the executive’s right to formulate policy factoring in the relevant concerns. The regulator’s concern that if banks waive the interest on loans, they would be unable to service deposits and meet their own costs is entirely valid. The ruling will help restore credit discipline and improve banking health.
That a sector is not satisfied with a policy decision cannot be reason for judicial interference, unless there are mala fide and arbitrariness in the said policy decision, the court made it clear. Rightly, the SC’s refusal to embark upon an inquiry whether public policy is wise or better policy can be evolved shows that it has chosen not to act in a manner that appropriates the powers of the executive.
However, the SC said that any interest on interest (compound interest) that has been collected from any of the borrowers for the period of the moratorium shall be adjusted in the next instalment payable. This appears to be stepping into the executive’s domain. However, allowing lenders to resume classifying delinquent debt as bad loans will help investors have a better idea as to the extent of bad loans, and enable banks to assess risk of borrowers turning into zombie firms. Genuine borrowers must be allowed to restructure their loans.
The government should resume insolvency resolution, to give companies a chance to turn around, if they have worked out plans with creditors and voluntarily file for insolvency. Firms that cannot be rehabilitated would have their assets ably redeployed. It should also swiftly amend the law to allow pre-packaged plans to aid restructuring and avoid liquidation.
This piece appeared as an editorial opinion in the print edition of The Economic Times.