J&K’s stressed bank loans: IBC, interest issues mired in uncertainty

Srinagar: Companies and businesses with stressed loan accounts in Jammu & Kashmir continue to be in a state of confusion about the next actions regarding the interest accumulations in view of the Union Finance Ministry’s reported move seeking extension of a moratorium on the Insolvency and Bankruptcy Code (IBC).

Informed sources in J&K Bank and State Bank of India told Ziraat Times that the banks were yet to receive clear-cut guidelines from the Reserve Bank of India or the Finance Ministry on the next steps on the stressed loans both for MSMEs with loan limits of Rs 2 crore and larger entities with higher loans.

Moratorium extension or not? Cause of the confusion

This situation has resulted in aggravation of confusion and anxiety among the business entities in J&K whose loan accounts are under intense stress and who wish a special consideration of their cases given the ‘extraordinary circumstances’ here.

This week, sources in the Finance Ministry say, the union government started formal conversations with banks over the possibility of reintroducing moratorium on new cases of stressed loans being tried under Insolvency and Bankruptcy Code (IBC). The government’s earlier suspension of bankruptcy action against corporate defaulters expired on March 24, 2021.

“The circumstances of post August 2019 have put J&K’s businesses with burgeoning loan accounts in even more difficult situation. Although some of the businesses have benefitted from interest subvention announced by J&K government last year, the fact is that bad loans are accumulating and there is confusion about how the situation would be addressed in the coming days in the face of the second wave of the pandemic”, a top industrialist from Kashmir told Ziraat Times.

However, highly-placed sources in J&K Bank and SBI maintain that several banks have already been planning to take several loan default cases to the National Company Law Tribunal (NCLT) to retrieve loans through insolvency process.

“The process of loan retrieval has already been initiated but it may go slow again as the Union Finance Ministry has last week re-started consultations with banks about suspending IBC in view of the new lockdowns. However, bank managements worry that such a suspension would only make banks’ NPAs in J&K even worse”, an official at J&K Bank said.

Insolvency and Bankruptcy Code (IBC) application for defaulting companies

Industry body ASSOCHAM last week had requested the government to reimpose moratorium on taking debt-ridden firms to the NCLT under the IBC till December 2021. The chamber said in a representation that the ministry that it would be imperative to extend the moratorium to ensure that the pandemic “does not wreak havoc” on the economy, an ASSOCHAM spokesperson said.

Sources in Finance Ministry indicate that the government was trying a “middle path”, by virtue of which they wish to provide companies with large interest accumulations some relief but at the same time not subject the banks to enhanced NPA risks.

Pertinently, the Supreme Court on March 23, 2021 ruled that banks cannot charge interest on interest for accounts on loans up to Rs 2 crore that sought a moratorium last year and the amount so collected must be refunded in the next installment of the loan account.

Interest reimbursement and adjustment issues

“As of now no formal instructions have been received from the union finance ministry about the way banks are supposed to deal with the compound interest issue, when it comes to MSMEs. There are some informal communications asking the banks to reimburse or adjust the compound interest they charged such entities in line with the Supreme Court order”, an official privy to the development at SBI told Ziraat Times.

“Banks have been told that they can also adjust the amount against future liabilities for such accounts, irrespective of whether they opted for the moratorium or not, similar to the scheme the government announced for loans up to Rs 2 crore, said an official aware of the development.

In 2020, J&K Bank reported that it has registered a net loss of Rs 1,139 crore for FY-20 ‘due to higher provisioning for bad loans.’

“RBI announced certain measures to mitigate the burden of debt servicing brought about by disruptions on account of Covid-19 pandemic and to ensure the continuity of viable businesses. It was felt that there may be a temporary disruption in the cash flows and in some cases loss of income, for the businesses. So a moratorium was introduced which is temporary in nature and results only in deferment of payment of interest/ principal/ installments. It is not a waiver. Interest shall continue to accrue on the outstanding portion of the loan/credit facility during the moratorium period”, a J&K Bank official said.

Will government compensate banks?

Banks in the country are considering making a representation to both the Reserve Bank of India (RBI) and the Centre through the Indian Banks’ Association (IBA) for help them bear the loss in case they were to forego the ‘interest on interest’.

The IBA approached the government last month asking it to enh­ance the scope of the scheme for ex-gratia payment of the difference between compo­und interest and simple interest, to cover the additional refund arising out of the Sup­reme Court’s order, according to Business Standard. The government hasn’t shown any inclination to compensate ba­nks for the compound inte­rest waiver, estimated at aro­und Rs 8,000 crore, so far.

Of this Rs 8,000 crore, private banks’ share is about 37 per cent and that of public sector banks around 60 per cent, said Anil Gupta, vice president and sector head – financial sector ratings at ICRA.

It is, as of yet, unclear how the government in J&K will deal J&K Bank’s bad debt issues, an official said.

(Junaid Shafi and Nikhil Sharma have contributed to this report)