RBI Urges SC to Lift Stay on Classification of NPA Accounts

The RBI said that the SC’s stay on classification of NPAs has huge implications for the banking system.

Reserve Bank of India (RBI)

(File Photo: IANS)

The Reserve Bank of India has urged the Supreme Court to lift the across-the-board stay on classification of non-performing asset (NPA) till further orders as it has huge implications for the banking system.

In a fresh affidavit filed in the apex court, the RBI said, “It is humbly submitted that this hon'ble court had given an across-the-board stay on classification of any account as NPA till further orders. If the stay is not lifted immediately, it shall have huge implications for the banking system, apart from undermining the regulatory mandate of the Reserve Bank of India.”

On September 3, in a respite to stressed borrowers, the Supreme Court had directed that accounts not declared NPAs as of August 31 should not be classified as such until further orders.

On October 3, in an affidavit, the Centre had informed the court that any account becoming non-performing even due to the bank's or any other delay need not suffer from being labelled as NPA.

Justifying the lifting of the stay on NPAs, the RBI cited its July 2015 circular aimed at reflecting the true and fair position of the accounts of banks so that the financial assets (which are public assets) will be accurately reflected in the books of accounts of the lenders.

“The classification of a loan account as NPA, based on the record of recovery, actually enables the lenders to follow the regulatory guidelines with regard to income recognition and provisioning. Every regulatory forbearance has its trade-offs in terms of adverse incentives and unintended consequences”, said the RBI in the affidavit.

The Centre also emphasised that it is not possible to revise its decision to waive interest-on-interest for loans up to Rs 2 crore, wherein the government would bear the cost for MSME loans and personal loans.

"This decision by the government to provide additional relief to a large segment of borrowers has addressed the primary prayers of the petitioners," the Centre said.

On the aspect of sector-specific relief instead of a monolithic resolution framework sought by reals estate and power sectors, the RBI said such prayers deliberately obfuscate the fact that resolution framework gives complete discretion to the lending institutions and borrowers to arrive at resolution plans tailored to the specific requirements of sector subject.

The RBI cited its September 7, circular, which provides for separate thresholds for 26 sectors, including power, real estate and construction. In respect of those sectors where the sector-specific thresholds have not been specified, lending institutions have been permitted to make their own internal assessments.

The RBI said that sectors such as power and real estate were already stressed even before the coronavirus pandemic on account of various factors pertaining to sector-specific problems. "Nonetheless, it is submitted that the travails of the realty sector cannot be solved through banking regulations. The banking regulations of the RBI cannot substitute the redressal of structural problems of the real estate sector," the affidavit read.

The RBI response came after the top court earlier this week told the government that its response did not contain "necessary details" and asked the Centre and the RBI to bring on record the KV Kamath committee recommendations on debt restructuring.