No compounding, punitive interest should be taken from the borrowers during the loan moratorium period: Supreme Court

The Supreme Court on 23 March barred banks from compounding interest (interest on interest) or punitive interest on any loan, regardless of the amount, during the moratorium period.

A three-judge bench of Justices Ashok Bhushan, Subhash Reddy and MR Shah held that the amount taken as compound interest or penal interest should be adjusted in future loan payments.

However, the court agreed with the Reserve Bank of India (RBI) that the extension of the date of the moratorium was “not viable”.

The court stated that judicial review on fiscal policies was limited. The court cannot order specific financial relief.

The court only. Questioned the justification for limiting compound interest on loans up to 2 crore.

The government introduced the pay-back scheme on October 23, 2020. The repayments of the scheme waived the difference between compound interest and simple interest between March 1 and August 31, with eight categories of loans up to ₹ 2 crore. .

The eight categories were MSME, education, housing, consumer durables, credit cards, auto, personal and consumption loans. The lending institutions included banking companies, public sector banks, co-operative banks, regional rural banks, all-India financial institutions, non-banking financial companies, housing finance companies registered with the RBI and national housing banks.

In November last year, the court directed the Center to implement the pay-back scheme.

However, borrowers had continued to push for the extension of the moratorium and also argued that the entire interest for the moratorium period should be abolished. The petitioners also stated that the 2-crore pay-back scheme does not provide relief to the large borrowers under the impact of the epidemic.

Settling the case for judgment on 17 December last year, the Indian Banks Association extended the pleas made by the petitioners beyond the financial stress that they had assumed during the epidemic.

The Center had said that complete relaxation of interest would cripple the economy and banking sector.

The State Bank of India had requested in support of small depositors who are the “backbone” of the banking system.

“Small depositors are useless in these proceedings. This is not a case of borrowers versus banks. They are the backbone of the financial system. Banks have to pay interest to these depositors. How can we leave them? What about each loan account?” ? ” 8.5 deposit accounts in the Indian banking system, ”senior advocate Mukul Rohatgi asked in the court on the last date of hearing.

The RBI had cited 3 circulars for the August 6 circular ‘Resolution Framework for COVID-19-Related Stress’ to indicate that lending institutions, as directed by the policy approved by their respective boards Will create viable resolution plans for eligible borrowers. However, the benefit will be provided only to borrowers due to COVID-19.