RBI Advisory On Moratorium Applicable Even To Loans On Default As On 1st March : Delhi HC [Read Order]

The Delhi High Court has held that the advisory issued by Reserve Bank of India on moratorium on loans in the wake of COVID-19 pandemic is applicable even to loans which were on default as on March 1, 2020.

On this premise, the Court restrained Yes Bank from classifying a loan, which was on default since January 1, as Non Performing Asset(NPA) with effect from March 1.

The Court rejected the contention of Yes Bank that the moratorium is applicable only to installments which fall due after March 1 and not to borrowers who were on default as on the said date.

The verdict is significant as it means that borrowers who have missed one or two installments can still avail the benefit of the moratorium. On March 27, the RBI Governor had announced that all lending insitutions are permitted to allow 3-month moratorium on the payment of installments of term loans outstanding as on March 1, 2020.

Regarding this, the Court observed that "the intention of RBI is to maintain status quo with regard to the classification of accounts of the borrowers as they existed as on 01.03.2020".

The order was passed in a case filed by a company "Anant Raj Limited" challenging the classification of its account as NPA by Yes Bank.

The installments of the loan were due since January 1. Therefore, as per the classification guidelines of RBI, the account was classified as "Special Mention-1 Account (SMA-1)" 30 days after January 1. After 60 days, the loan was classified as "Special Mention-2 Account (SMA-2).

On March 27, Yes Bank sent an email to the company proposing to classify the account as NPA if the dues are not cleared by March 31.

Challenging this, the company moved the High Court, claiming benefits of the RBI advisory. The bank contended that since the installment was not paid till 31.03.2020, the account of the petitioner was liable to be classified as NPA. 

It was further contended by the bank that the RBI package is applicable only to those installments which fall due on 01.03.2020 and also only to those borrowers who were properly servicing their account till 01.03.2020 and were not in default. 

Rejecting this contention, Justice Sanjeev Sachdeva observed :

"If the Regulatory Package is applicable only to Standard Asset accounts, there was no necessity for the RBI to refer to Classification of an account as a Non-PerformingAsset (NPA) in its Regulatory Package and RBI could have only referred to the change of classification as a SMA".

The Court noted that a "Standard Account" cannot be straightaway classified as NPA, without its prior inclusions in SMA-1 and SMA-2 categories. Hence, the RBI intended the extension of benefit even to accounts included in SMA-1 and SMA-2 categories as on March 1, reasoned the Court.

"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 non-performing 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", Justice Sachdeva noted in the interim order. 

"Since the account cannot be classified as SMA for instalments falling due post 01.03.2020, where was the question of stipulating a moratorium for classification as a Non-Performing Asset (NPA)", the Court observed.

On the basis of these observations, the Court passed an interim order directing Yes Bank to restore 'status quo ante' as on March 1 with respect to the loan classification of the petitioner.

"Prima facie, I am of the view that the classification of the account of the petitioner as an NPA on 31.03.2020 could not have been done by the respondent. Accordingly, status quo ante is restored qua the classification of the account of petitioner and the account classification as it stood on 01.03.2020 shall stand restored", Justice Sanjeev Sachdeva ordered.

The Court however clarified that interest and penal charges will continue to accrue and that the loan classification will change to NPA if the borrower fails to clear the dues after the moratorium.

"The effect of the same would be that for a period of three months there will be a moratorium from payment of that instalment. However, stipulated interest and penal charges shall continue to accrue on the outstanding payment even during the moratorium period. If post the moratorium period borrower fails to pay the said instalment, classification would then automatically change as per the IRAC guidelines", observed the Court.

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