Finance minister Nirmala Sitharaman and the Supreme Court separately offered a much-needed breather to bank borrowers on Thursday, stepping in to prevent loans under stress from impairing their creditworthiness, two days after the lapse of a moratorium on loan repayments necessitated by the coronavirus disease (Covid-19) pandemic.

The top court passed an interim order that loan accounts that hadn’t been declared non-performing as of August 31 shall not be classified as such until further notice. And at a review meeting to assess banks’ preparedness to implement a loan resolution framework in the aftermath of Covid-19, Sitharaman urged the lenders to support both corporate and individual borrowers who may be under stress, the finance ministry said in a statement.

Sitharaman asked banks to roll out loan resolution plans by September, the ministry added. “During her interaction, the finance minister focused on lenders immediately putting in place board-approved policy for resolution, identifying eligible borrowers and reaching out to them.”

“The lenders assured {Sitharaman} that they are ready with their resolution policies, have started the process of identifying and reaching out to eligible borrowers, and that they will comply with the timelines stipulated by the Reserve Bank of India,” the ministry said.

This meeting via video conferencing took place ahead of recommendations by a panel headed by former ICICI Bank chief KV Kamath on the eligibility parameters for restructuring of loans hit by the Covid-19 crisis. In August, Reserve Bank of India (RBI) governor Shaktikanta Das said a resolution framework for all Covid-19 related stressed accounts will be finalised by September 6.

Restructuring some loans will support economic recovery and help borrowers tide over the crisis. India’s economic growth contracted by a record 23.9% in the three months ended June as companies put investments on hold and households pared spending during the 68-day complete lockdown that was in place starting on March 25. Business activity is yet to return to pre-pandemic levels.

Thursday’s intervention by the Supreme Court and the finance minister should assure companies, many of which had to stop production and shut their businesses, and individuals, many of whom suffered job losses or had their pay cut, that their accounts will not immediately be classified as bad loans after the August 31 lapse of the six-month moratorium on loan repayments. More importantly, analysts pointed out, they can borrow more.

US investment bank Jefferies estimates that borrowers accounting for 31% of outstanding loans took up the offer of a moratorium, and this eased to about 18% by the end of June as businesses gradually reopened and some realised that postponing repayments could end up being costlier. Indian banks entered the pandemic laden with bad loans estimated at $140 billion.

The apex court’s ruling came after it heard a batch of petitions seeking an interest waiver on the loan moratorium granted by RBI. In the aftermath of the pandemic, the central bank allowed the lenders to grant a loan moratorium for three months of equated monthly Instalments, falling due between March 1 and May 31. RBI subsequently extended this for three more month until August 31.

The interim order was passed by a bench headed by justice Ashok Bhushan and comprising justices R Subhash Reddy and MR Shah..

Solicitor general Tushar Mehta told the bench: “The idea of the moratorium was to defer repayment to ease the burden caused by Covid-19 and lockdown so that business can manage working capital. The idea was not to waive interest. The effort is that those who are affected by Covid and facing distress get the benefit and those who are defaulters are not able to take the benefit.”

“Question is about the demands of compound interest in the meantime. Moratorium and penal interest cannot go together. RBI will have to clarify,” said justice Reddy.

(Mint and Agencies contributed to this story)