Loan Moratorium Case: No Levy of Compound/Penal Interest on any Borrower, Rules SC

Supreme Court orders banks/FIs to refund interest collected during moratorium; allows lenders to resume NPA tagging of bad loans

The Supreme Court on Tuesday directed banks and financial institutions to refund the compound interest (interest on interest or penal interest) collected on EMIs during the loan moratorium period, from March 1 to August 31, 2020.

“It is directed that there shall not be any charge of interest on interest/compound interest/penal interest for the period during the moratorium,” a Bench of Justices Ashok Bhushan, R. Subhash Reddy and MR Shah ordered in a 148-page judgment. The court said the amount accumulated as compound/penal interest or interest on interest during the six-month moratorium on term loan EMIs should be given as “credit/adjusted in the next instalment of the loan account”.

Justice Shah, who authored the judgment, reasoned that the additional interest in the form of compounding or penalty is usually collected from defaulters. When the payment of instalments had been deferred during the moratorium, what was the need to burden borrowers, already reeling under the financial loss of a pandemic and lockdown, the court asked.

Relief for lenders

The judgment also spelt relief for banks and lenders with the court lifting its near-six-month bar on classifying accounts of defaulting borrowers as non-performing assets. In October, the apex court had stopped banks and lenders from declaring accounts of borrowers as NPAs.

‘Irrational’ scheme

The judgment termed as irrational the government’s plan to restrict the waiver of interest on interest to loans of up to ₹2crore. This scheme, introduced in October, was limited to debts in MSME, education, housing, consumer durables, credit card, auto, personal and consumption categories within the ₹2crore limit.

“There is no justification shown to restrict the relief of not charging interest on interest with respect to the loans up to ₹2 crore only, and that too, restricted to the aforesaid (eight) categories. There is no rationale to restrict such relief,” Justice Shah noted. But the court refused to entertain complaints from petitioners that the government did not do enough to ease the financial strain during the pandemic.

“By and large, everybody has suffered due to the lockdown due to Covid19 pandemic. Even the Government suffered due to non-recovery of GST... Merely, since the reliefs announced by the Union of India/RBI may not suit the desires of the borrowers, the reliefs/policy decisions related to Covid-19 cannot be said to be arbitrary or violative of Article 14 of the Constitution,” the court said.

No total waiver

The apex court also refused the insistent pleas of the borrowers for a total waiver of interest for EMIs falling within the moratorium period. It declined to extend the moratorium till December 2020 or, as some of the petitioners sought, for another six months from August 31, 2020. The court said a total waiver of interest would hit banks and depositors hard.

“To grant such a relief of total waiver of interest during the moratorium period would have a far-reaching financial implication in the economy. Banks and lenders have to pay the interest to the depositors. Their liability to pay the interest on the deposits continued even during the moratorium period… Continuing to pay interest to depositors is not only one of the most essential banking activities but it shall be a huge responsibility owed by the banks to crores and crores of small depositors, pensioners, etc, who survive on the interest from their deposits,” Justice Shah reasoned. Besides, the court said numerous welfare funds schemes survive on the interest generated from bank deposits.

The court further declined pleas to extend the deadline, from December 31, 2020, for the invocation of RBI’s resolution mechanism for “big borrowers” like businesses and manufacturing sectors. The mechanism titled ‘Resolution Framework for Covid-19-related Stress’ issued in an August 6 circular had informed that lending institutions, guided by their respective board-approved policy, would prepare viable resolution plans for eligible borrowers under stress on account of Covid-19.

Ruling welcomed

The decision has gone down well among experts and the legal fraternity. Jay Parikh, Partner, L&L Partners, said that the refusal to extend moratorium and the vacation of the stay on the classification of NPAs by banks is a shot-in-the-arm for the banking sector.

Sanjay Tibrewala, CEO, Phoenix ARC said: “Complete waiver of interest during the moratorium would have badly hurt the balance sheet of lenders... The lenders can now recognise their NPAs and start taking appropriate corrective action for recoveries.”

Anshuman Panwar, Co-Founder, Creditas Solutions, a digital-based debt collection platform, said, “It ensures the payment culture of retail borrowers remains intact.”