Keep status quo on asset classification: HC to banks

Kolkata: The Delhi High Court has given some relief to companies that have missed a loan repayment or two but whose loans were not classified as ‘bad’ by March 1, 2020. The court has said banks should maintain status quo on asset classification between March 1 and May 31 — the period for which the RBI has advised moratorium on term loans for stressed borrowers.

Hearing a case between Yes Bank and Anant Raj, the court said the company’s account should be counted as ‘standard’ and it must be permitted to avail of the moratorium even if it has missed payments, since the account was not classified as a ‘bad loan’ before March 1.

Banks classify a loan as ‘bad’ if it is overdue for 90 days. Missing a payment after 30 days leads to a loan being classified as Special Mention Account-1 (SMA-1). Failing to make payments for two straight months leads to an account being classified as SMA-2.


The verdict means companies that had missed a payment or two can avail of the moratorium announced by the RBI, without fear of their loans being classified as ‘bad’.

Interest, Penalty will Continue to Accrue

“The restriction on change in classification as mentioned in the regulatory package shows that RBI has stipulated that the account which has been classified as SMA-2 cannot further be classified as a nonperforming asset in case the instalment is not paid during the moratorium period, i.e.- between 01.03.2020 and 31.05.2020, and status quo qua the classification as SMA-2 shall have to be maintained,” the court said in its interim order.

However, the HC said interestand penal charges will continue to accrue and the loan classification will change to ‘bad’ if the borrower fails to repay at the end of the moratorium.

“The effect of the order will be that for a period of three months, there will be a moratorium on payment of installments. However, stipulated interest and penal charges shall continue to accrue on the outstanding amount during the moratorium period. If the borrower fails to pay the said instalment at the end of the moratorium period, the classification of the loan would automatically change as per IRAC (Income Recognition and Asset Classification) guidelines,” said Delhi High Court judge Sanjeev Sachdeva.

Asset Classification

The RBI has directed banks to offer a moratorium of three months ending May 31 for all loan repayments. But in a separate communication, it refused banks’ request for a freeze in asset classification for borrowers who had missed a payment or two. It said these borrowers’ woes were not because of the Covid-19 outbreak.

“The benefit of moratorium can be extended to such borrowers in respect of payment falling due during March 1 to May 31. However, the payments overdue as on or before February 29 will attract the current IRAC norms,” the RBI told banks separately.

Bankers tracking the issue said they expect more companies to take the legal route if doubts persist over asset classification norms. “We cannot deny the fact that borrowers, even with previous overdue payments, may be facing genuine hurdles in generating cash flows,” said a senior executive with a public sector bank.

Anant Raj had borrowed Rs 1,570 crore from Yes Bank. It has repaid Rs 1,056 crore, apart from interest running into hundreds of crores. It had been regularly servicing the loans till December, but defaulted on the instalment due on January 1, 2020. The account was classified as SMA-2 since the payment was overdue for more than 60 days.

The court has listed the case for final hearing on May 4.

Source Article

Lois C. Ferrara

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