NEW DELHI: The Centre is in favour of extending the moratorium on term loan EMIs beyond August 31, but an announcement will be made only after the legal and technical issues are fixed.
“RBI has to sort out two things — one-time restructuring of loans and the legal response to the Supreme Court on whether banks can charge ‘interest on interest’. Only when these two issues are fixed, will an extension be announced,” said a senior official from the finance ministry.
As the current moratorium will end in August, banks will have to declare many loans as non-performing assets in their second quarter result, else they will fall short of minimum capital requirement.
Fitch Ratings estimates that under a moderate stress scenario, PSU banks will need at least $15 billion to meet Tier-1 norms. Which means the banks will require immediate recapitalisation.
Restructuring will take away that burden to a great extent, but RBI will have to define the terms for restructuring before the current moratorium ends.
Another issue is that many businesses have moved court over denial of moratorium and also over the interest charged during the relief period.
Recently, the Karnataka High Court ruled that banks cannot deny moratorium to businesses whose survival is at stake.
“Courts can ask RBI to enforce moratorium. Courts can also ask banks not to sit over borrowers’ request for moratorium,” said Veena Sivaramakrishnan, partner, Shardul Amarchand Mangaldas & Co.
But the situation is tricky as the SC is looking at the legality of ‘interest on interest’ (EMI already includes interest, so charging interest for moratorium period will be interest on interest).
However, if this is waived, it will dent banks’ profitability. So, extending the moratorium without charging interest will be challenging for the finance ministry.
‘Interest on interest’
Last month, the Supreme Court said there is “no merit in charging interest on interest” for deferred EMIs during the moratorium period. The matter will again come up for hearing in the first week of August