Supreme Court Judgment on Bad Loans

The Supreme Court has disallowed the extension of the moratorium period on loans allowed by RBI due to Covid. It has also vacated its previous stay on the classification of bad loans.

RBI had, in March 2020, allowed loans to enter moratorium up to August 31^st 2020 and some borrowers asked for an extension from the Court. In September, the Court directed that banks should not classify any loans as non-performing assets (NPA) until this matter was decided.

NPA is a very important number for investors to gauge the health of a bank. It indicates the quality of lending practices and assets in a bank. This number has not been available to investors for more than a year since Covid struck India. This, combined with the self-evident fact that the actual quality of loans in the entire country had been materially affected by the pandemic, made the financial sector even more risky for investors during this period than it is in normal times.

Bank financial results over the next few months will finally throw some light on the extent of damage inflicted by the first wave of Covid lockdowns on businesses and families around the country.