In a move that provides clarity on what could have potentially become a sticky point in the interpretation of the regulatory guidelines issued by the RBI, the Delhi High Court has ordered that the RBI moratorium is applicable even to loans which were on default as on 01.03.2020.
The case was filed by a company namely Anant Raj Limited against the classification of its account as a Non Performing Asset (NPA) by Yes Bank. Briefly, the Company had failed to pay its loan installments since 01.01.2020 and in keeping with the classification prescribed by the RBI, the Company’s account was initially classified as Special Mention-I Account (SMA-I) and subsequently as Special Mention-II Account (SMA-II). Yes Bank, on 27.03.2020, proceeded to issue an e-mail wherein it communicated that the company’s account will be declared as an NPA should the outstanding dues not be cleared by 31.03.2020.The Company, before the Hon’ble Court, claimed the benefit of the guidelines issued by the RBI, however, it was disputed by the bank that the relief package would only be applicable to installments which had fallen due on 01.03.2020. Moreover, the relief would only apply to borrowers who had been regularly servicing their account till 01.03.2020 and were not in any default.
The Court, while refuting the contentions of the Bank, was of the view that a “Standard Account” cannot be immediately classified as NPA, without first being included in SMA-1 and SMA-2 categories. Accordingly, the Court held that it can be inferred by the guidelines issued by RBI , that the RBI intended for the extension of benefit even to accounts that were included in SMA-1 and SMA-2 categories as on 01.03.2020. That is to say, even an account that is SMA-II as on the date of the effect of the RBI guidelines, cannot be further classified as an NPA in case if the installments have not been paid.
The Hon’ble Single Judge, therefore, passed the interim order directing the bank to restore status quo vis-à-vis the further classification of the Company’s account. However, the Court also made it clear that interest and penalty will continue to accrue and the company will be in default if the dues are not cleared after the expiration of the moratorium period.
This order is significant because it will bring relief to even those people who may have missed paying one or two loan installments and honours the true intent of the RBI guidelines, which is to ease the immediate financial burden that so many borrowers are facing due to COVID-19.
The interim relief granted by the Hon’ble Court, while on one hand is a welcome clarification, however, on the other hand, does not address the issue that the relaxation granted by the RBI read with the relief passed by the Court, would only apply in cases where the borrower has availed of the moratorium benefit and the same has been granted by the bank.
It is important to remember that the implementation & execution of the RBI guidelines has been left at the discretion of the bank and automatic applicability of the moratorium is not the rule but rather differs from bank to bank. In light of this fact, the present case (since the Petitioner took shelter of the moratorium before the Court) and those cases where borrowers have applied to be covered by the moratorium, the order passed by the Ld. Single Judge can be relied upon. However, we believe that, in cases where borrowers have not availed the benefit of the moratorium extended by the RBI, the abovementioned order cannot be relied upon. Therefore, since the Hon’ble Court, in its order, has not acknowledged this aspect, it may have to deal with it in a more detailed manner, should another similar matter come for adjudication before it.