India’s Top Court Extends Relaxation of Rules for Bad Loans
The Supreme Court stands in New Delhi, India. (Photographer: T. Narayan/Bloomberg)

India’s Top Court Extends Relaxation of Rules for Bad Loans

India’s top court extended the easing of rules over the classification of non-performing loans until further notice, delaying the disclosure of how much bad debt banks hold.

The three-judge bench headed by Justice Ashok Bhushan on Thursday gave the government two weeks to come up with relief measures for virus-hit businesses and said such a decision had to be put before the court for consideration. It also reiterated that banks must not classify any loans as bad if they were performing at the end of August until further order.

The court said the government and central bank must also clarify their views on requests to waive additional interest on deferred installments during the moratorium, and put a temporary halt on credit rating downgrades so an “appropriate order” can be issued at the next hearing on September 28, according to the order published on the court’s website.

Thursday’s hearing came after a group of borrowers petitioned to stop banks from collecting interest during the loan moratorium that ended in August. The central bank had allowed lenders to excuse cash-strapped borrowers from paying installments until August 31 and lenders to collect interest for the period the repayment was due once the moratorium ended.

PlanApplies toStart DateValid Until
MoratoriumLoans that were performing until March 1March 1, 2020August 31, 2020
Loan restructuringLoans that were performing until March 1 (may also apply to loans under the moratorium)Sept. 1, 2020Dec. 31, 2022
Top Court interim order on bad debtsAll loans that were performing until Aug. 31Sept. 1, 2020Until further order

After the moratorium ended, it was replaced by a longer-term loan restructuring program for up to two years. The central bank also set strict eligibility criteria for borrowers who had been hit hard by the economic fallout of the pandemic.

A delay in recognizing problem loans means that bad debt could fester for longer in a nation that contracted 23.9% in the June quarter, the most among the world’s largest economies. That will add to the pile of India’s non-performing debt, which is already the highest among major markets globally.

India’s Top Court Extends Relaxation of Rules for Bad Loans

While borrowers accounting for more than a third of the outstanding loans sought a repayment holiday when the program was announced in late March, many didn’t go for an extension to the moratorium in May after realizing the higher costs. That meant that the percentage of borrowers opting for a second loan holiday dropped to 18% in June, according to estimates by Jefferies Financial Group Inc.

©2020 Bloomberg L.P.

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