SC stops banks from charging penal interest on any borrower during loan moratorium period

The Supreme Court on Tuesday directed banks that there should be no interest on interest and penal interest on the instalments that were due during the loan moratorium period from March 1 to August 31 last year on any borrower, irrespective of the loan amount, reported Live Law.

The court said that if any such interest has been collected, it should be adjusted towards the next instalments.

A Bench of Justices Ashok Bhushan, R Subhash Reddy and MR Shah observed that there was no rationale behind the Centre’s policy to limit the benefit of waiver of interest on interest, or compound interest, only to certain loan categories. Last year, the central government had decided to allow waiver of interest on interest in eight specified loan categories for loans up to Rs 2 crore.

During the hearing, the court noted that it was not possible to order a complete waiver of compound interest during the loan moratorium period as banks have to pay interest to depositors and pensioners. It directed the Centre to come out with a policy decision with respect to the compound interest, suggesting that it may be charged only in cases of deliberate and wilful default.

The court also rejected the plea of the borrowers for the extension of the six-month loan moratorium period granted by the Reserve Bank of India on account of the coronavirus pandemic. The bench also rejected the borrowers’ plea for sector-wise reliefs provided by the RBI and reliefs above the packages already offered, according to Bar and Bench.

The bench observed that the extent and manner in which economic packages and reliefs should be provided falls within the scope of the executive. “The court will not embark upon inquiry whether public policy is wise or better policy can be evolved,” the order said. “Economic and fiscal policies are not amenable to judicial review and merely because a sector is not satisfied with a policy decision, cannot be reason for interference unless there are malafides and arbitrariness in the said policy decision.”

The court also observed that the government had suffered due to the pandemic and loss in Goods and Services Tax revenue. “From various steps taken by Centre and RBI, it cannot be said that Centre has not taken steps in the backdrop of Covid-19”, the bench noted.

The court had reserved the verdict on December 17 after hearing the petitioners, the Centre, the RBI and the intervenors.

Loan moratorium

Considering the economic impact of the lockdown imposed to fight the coronavirus crisis, the Reserve Bank of India had on March 27 said that banks would be allowed to grant a moratorium of three months on payment of all installments due between March 1 and May 31. On May 23, it said that banks can extend the moratorium until August 31. However, the RBI had said it would be imprudent to go for a forced waiver of interest, risking the financial viability of the banks it was mandated to regulate and putting the interests of the depositors in jeopardy.

In August, the Centre said the loan moratorium scheme can be extended by a period of two years after the top court had criticised the Centre for “hiding behind the RBI” without making its stand clear on the loan moratorium.

On October 14, the top court refused to allow the Centre a month’s time to implement the interest waiver on loans of up to Rs 2 crore. It directed that the execution of waiver should be done by November 2. The government claimed that the deadline for providing relief to borrowers was November 15.

The Centre had submitted an affidavit to the court on October 9, in which it said that it was not possible to provide more relief to different sectors affected by the coronavirus crisis. The Centre had even then said that “courts should not interfere in fiscal policy”. The Reserve Bank of India had also told the Supreme Court that it was not possible to extend the moratorium beyond six months.

On November 19, the Centre had again appealed to the Supreme Court not to intervene and give more relief to borrowers as the government was already dealing with it.