SC refuses to extend loan moratorium period but gives relief on ‘interest on interest’

The Supreme Court on Tuesday refused a total waiver of interest on loans during a six-month-long moratorium period offered by the Reserve Bank of India last year. The top court also ruled out extending the period of the loan moratorium which ended on August 31, 2020. 

The court said it can not intervene in the government’s economic or fiscal policies unless they were malafide and arbitrary, according to a copy of the order accessed by Entrackr. Waiving the interest on these loans will not be possible since it could affect depositors, and could have far-reaching consequences on the economy, the order said. 

However, the court said that “there was no justification” to charge interest on interest, compound interest and penal interest from borrowers for loans during the moratorium period irrespective of the amount of loan they had taken from banks.

“Whatever the amount is recovered by way of interest on interest/compound interest/penal interest for the period during the moratorium, the same shall be refunded and to be adjusted/given credit in the next instalment of the loan account,” the order said.

A bench headed by Justice Ashok Bhushan delivered its order on a batch of petitions filed by several trade unions and corporate bodies, urging the top court to waive the interest on loans during the moratorium altogether, and also to extend the period of the moratorium in the wake of the pandemic. 

The petitions largely contested that the relief package notified by the RBI was “inadequate, ineffective and does not offer any substantial relief, aid or assistance to the industries particularly [micro small and medium enterprises] MSMEs”. 

The bench also rejected directing the RBI to offer sector-specific relief. 

In March last year, the Reserve Bank of India had announced a moratorium on all term loan instalments between March 1 and May 31, in the wake of the nationwide lockdowns imposed owing to the COVID-19 pandemic. The moratorium period was later extended until the end of August. The relief covered loans availed by MSMEs, housing loans, education loans and credit card dues, among others. 

In its submission to the court, the government estimated that it will have to waive off an estimated Rs 6 lakh crore towards interest on the loans during the six-month moratorium period. This, in the government’s submission, will wipe out a substantial and a major part of the banks’ net worth, rendering most of them unviable, and raise a very serious question mark over their survival. 

“It is estimated that in the Indian Banking system for every  ‘loan account’   there are about 8.5 ‘deposit accounts. The banks can pay interest to depositors only because borrowers pay interest to the bank.  This transaction of depositors/banks/borrowers is inevitably a part of a chain that can never be permitted to be broken,” the government submitted in front of the court, as per the order. 

In October, the government had proposed waiving compound interest for loans up to Rs 2 crore for select categories of borrowers, including MSMEs, housing loans, and education loans. 

But the top court said that certain conditions of the government’s proposal are arbitrary and discriminatory. For instance, the government’s loan waiver scheme demanded that the outstanding amount should not exceed Rs 2 crore of all facilities with the lending institution, for the borrower to be eligible for the waiver. 

“For example, if the borrower has been sanctioned a loan of Rs 5 crore and has availed of the same, even though he might have repaid substantially bringing down the principal amount of less than Rs 2 crore as on 29.02.2020, but because of the sanction of the loan amount of more than Rs. 2 crores, he will be ineligible,” the order said, exemplifying the problem. 

The government has not given any justification about the rationale behind relaxing the collection of the interest on interest on loans upto Rs 2 crore, the court held. “Therefore, as such, there is no rationale to restrict such relief with respect to loans up to Rs 2 crore only,” the order said.

Shares of Indian banks rallied following the order with stocks of banking bellwethers State Bank of India, ICICI and HDFC posting handsome gains. The shares of SBI, ICICI and HDFC bank ended the trading day up 1.4%, 2.19% and 2.48% respectively on the National Stock Exchange.