loan moratorium : No compound or penal interest be charged from borrowers during moratorium period, directs SC – The Economic Times

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The bench refused to further extend the moratorium period beyond Aug 31, 2020, or the deadline for resolution of stressed assets beyond Dec 31, 2020, or grant any other relief sought by badly hit sectors such as power and real estate.

The Supreme Court refused to extend the loan moratorium for pandemic-hit borrowers but said penal interest shouldn’t be recovered on deferred payments, except in cases of wilful default. It rejected a plea for the full waiver of all interest on loans not paid during the six-month period, in a ruling on Tuesday. The court also lifted a stay it had earlier imposed on banks declaring defaulting loan accounts as nonperforming assets (NPAs).

Banks cannot charge penal interest, especially when the moratorium had been announced to help those hit by the lockdown during the pandemic, ruled the three-judge bench led by Ashok Bhushan. The other members of the bench were R Subhash Reddy and MR Shah.

“There shall not be any charge of interest on interest, compound interest, penal interest for the period during the moratorium and any amount already recovered under the same head, namely, interest on interest, penal interest, compound interest shall be refunded to the concerned borrowers and to be given credit, adjusted in the next instalment of the loan account,” the court said. “Interim relief granted earlier not to declare the accounts of respective borrowers as NPA stands vacated.”

The bench refused to further extend the moratorium period beyond Aug 31, 2020, or the deadline for resolution of stressed assets beyond Dec 31, 2020, or grant any other relief sought by badly hit sectors such as power and real estate.

The RBI had in a notification issued on March 27, 2020, declared a loan moratorium for the six months between March 1and August 31, applicable to all banks, nonbanking financial companies, housing finance companies and other financial institutions.


In a subsequent notification, the government fixed the deadline for resolution of stressed assets at Dec 31, 2020. The court had been petitioned to direct an extension of both dates.

It was later decided to impose interest and interest on interest on any loans not paid during the moratorium period as it envisaged a deferred payment of the loans and not a full waiver. This was challenged in the top court, which ruled in favour of the borrowers on this count.

At the court’s nudging, the government had on Oct 23, 2020, announced that it would waive interest on interest only on MSMEs and personal loans not exceeding Rs 2 crore in eight categories.

These included MSME loans, education loans, housing loans, consumer durable loans, credit card dues, automobile loans, personal loans to professionals and consumption loans.

The court said this limit lacked rationale and was discriminatory and extended it to all loan payments that were deferred during the moratorium except those specifically barred under the scheme–accounts classified as NPAs as on February 29, 2020.

“The government has also suffered. It has lost revenues (by way of lost GST),” justice Shah observed. Banks also have to pay interest to consumers, he added, justifying the court’s decision not to grant any further relief to any sector or individual.

Judges should approach economic and fiscal regulatory measures with care as they are not experts in these matters, the court said.

Besides, governments have their own priorities and financial constraints. The legality of the policy and not the wisdom or soundness of the policy was the subject of judicial review, it said.

“Therefore, as such, no writ of mandamus can be issued directing the government, RBI to announce/declare particular relief packages and/or to declare a particular policy, more particularly when many complex issues will arise in the field of economy and what will be the overall effect on the economy of the country for which the courts do not have any expertise and which shall be left to the Government and the RBI to announce the relief packages/economic policy in the form of reliefs on the basis of the advice of the experts,” the court said.

Many affected sectors such as power, real estate, textiles, small shopkeepers, gems and jewellery sector, hotel and restaurants etc had moved the court for relief by way of concessional credit, moratorium extension, longer payment schedules among other things until the stress on these sectors due to the pandemic eased.

The government though had warned the court against granting any more relief, citing the demands of a burgeoning health budget during the pandemic, and the loss it would cause the banking sector. The government had estimated the loss to the banking sector that would be caused by a full waiver at Rs 6 lakh crore.

(With inputs from Kailash Babar in Mumbai)

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