No Compound or Penal Interest to be charged during Loan Moratorium period but denies Complete waiver of Interest: SC [Read Judgement]

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On Tuesday, in a relief to borrowers, the Supreme Court directed that no compound or penal interest be charged during the six-month loan moratorium period announced last year amid the COVID-19 pandemic and the amount already charged shall be refunded, credited or adjusted.

The apex court refused to interfere with the Centre’s and the Reserve Bank of India (RBI’s) decision to not extend the loan moratorium beyond 31 August last year, saying it is a policy decision. A bench headed by Justice Ashok Bhushan said that the top court cannot do judicial review of the Centre’s financial policy decision unless it is malafide and arbitrary.

The apex court said it cannot interfere with the government’s decision to fix priorities for relief during the pandemic which has affected all across the country and the government has been under severe financial constraints.

The bench said this in its verdict on a batch of pleas filed by various trade associations, including from real estate and power sectors, seeking extension of loan moratorium and other reliefs in view of the pandemic.

The RBI had on 27 March last year issued the circular which allowed lending institutions to grant a moratorium on payment of instalments of term loans falling due between 1 March, 2020 and 31 May, 2020, due to the pandemic. Later, the moratorium was extended till 31 August last year. In its verdict, the top court said that from various steps taken by the government, it cannot be said that the Centre and the RBI have not considered the relief for the borrowers.

The bench said it cannot strike down a policy decision merely at the behest of petitioners on grounds that the other view is possible and the other decision could be more beneficial. While refusing to go into the financial policy decision taken by the government, the bench said it is not open for the court to embark upon judicial review of policy decision merely at the behest of petitioners.

It said that complete waiver of interest is not possible as it will have huge financial implications. The apex court had reserved its judgement on the batch of pleas on 17 December last year.

The Centre had earlier submitted before the top court that if it were to consider waiving interest on all the loans and advances to all categories of borrowers for the six-month moratorium period announced by RBI, then the amount foregone would be more than Rs 6 lakh crore.

If the banks were to bear this burden, then it would necessarily wipe out a substantial and a major part of their net worth, rendering most of the lenders unviable and raising a very serious question mark over their very survival, it had said. The government had said this was a main reason as to why waiver of interest was not even contemplated and only payment of instalments was deferred.

Giving an illustration, it had said that in case of State Bank of India alone, waiver of six months’ interest would completely wipe out over half of the bank’s net worth which has accumulated over nearly 65 years of its existence.

It had pointed out the sector-specific relief measures taken by the government for the small and mid-sized business/MSMEs including from sectors such as restaurants and hotels. The Centre has promulgated emergency credit-linked guarantee scheme (ECLGS) of Rs 3 lakh crore providing additional credit at lower rate of interest, with 100 per cent government guarantee and no fresh collateral, it had said.

The scheme has been extended with higher financial limits to twenty seven COVID-19 impacted sectors including restaurant and hotel sectors, it had said. On 27 November last year, the top court had asked the Centre to ensure that all steps be taken to implement its decision to forego interest on eight specified categories of loans paid up to Rs 2 crore in view of the pandemic.

The eight categories of loans are MSME (Micro, Small & Medium Enterprises), Education, Housing, Consumer durable, Credit card, Automobile, Personal and Consumption. 

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