The Hon'ble Apex Court has ruled that there should be no compound interest, interest on interest or penal interest on the borrowers who did not pay installments by availing the loan moratorium scheme extended by the Reserve Bank of India (RBI) vide notification dated 27.03.20201 during 1st March to 31st August 2020 due to the ongoing Covid-19 Pandemic. (Small Scale Industrial Manufacturers Association vs. Union of India)2
Various aspects of the important ruling which will impact thousands of borrowers and financial institutions are as follows:
WAIVER FOR ALL BORROWERS
The Full Bench comprising of Justices Ashok Bhushan, Justice R. Subhash Reddy and Justice M.R. Shah has observed that the Central Government's policy restricting the benefit of waiver of compound interest with respect to loans up to Rs. two crores only was baseless and devoid of reason. The Hon'ble Court cited the examples where if the borrower had taken a loan in excess of Rs. 2 crores and paid off most of it bringing down the principal amount to less than Rs. 2 crores as of 29.02.2020 but because of the sanction loan amount being more than Rs. 2 crores, he would be deprived of the benefit under the scheme. Last year in 2020, the Centre had taken a decision to allow waiver of interest on interest in eight specified categories for loans up to Rs. 2 crores. The Court termed the policy as "arbitrary" and "discriminatory". The categories in which the Central Govt. and the RBI agreed to waive compound interest during the loan moratorium period are :
- MSME loans up to Rs. 2 crore
- Education loans up to Rs. 2 crore
- Housing loans up to Rs. 2 crore
- Consumer durable loans up to Rs. 2 crore
- Credit card dues up to Rs. 2 crore
- Automobile loans up to Rs. 2 crore
- Personal loans to professionals up to Rs. 2 crore
- Consumption loans up to Rs. 2 crore
The Bench further opined that as per notification dated 27.03.2020, non-payment of instalment during the moratorium period cannot be termed as wilful default. Thus, compound interest cannot be charged from any of the borrowers and whatever amount is recovered by way of interest or compound interest or penal interest for the moratorium period has to be refunded and subsequently adjusted by crediting in the next instalment.
REFUSAL TO TOTAL WAIVER OF INTEREST
The Hon'ble Court has remarked that the banks and other lending institutions also have to fulfil their obligation of paying interest to the depositors and it continues even during the moratorium period. Apart from paying interest, banks and lenders have to bear other administrative expenses also which include but are not limited to paying salaries of employees, maintenance charges of deposits, etc. The Hon'ble Court highlighted that continued payment of interest to the depositors is not only the most important banking activity but also a massive responsibility. Several welfare fund schemes are dependant on the interest generated by their deposits. Therefore, granting a total waiver of interest during the moratorium period would have wide-reaching implications on the economic health of the country and banks.
The Court took cognizance of the fact that RBI and banks independently had offered to defer payments of instalments and many reliefs, therefore, the policy decision of not waiving-off interest during the period of moratorium did not merit interference of the Court.
GOVERNMENT HAS ALSO SUFFERED LOSSES
The Court while rejecting the relief that RBI should have issued sector-specific relief packages, held that RBI had highlighted separate threshold for 26 sectors including power, real estate and construction in circular dated 07.09.20203. Further, each sector has suffered differently and it is next to impossible to provide sector-specific relief.
It was also observed by the Hon'ble Court that decisions on economic policy on the ground that the same are not sufficient or efficacious was out of the purview of the Court. Financial policy is a field in which courts should tread warily, as judges are not experts. In what manner financial packages and reliefs should be provided is to be decided by the Central Government with the aid and advice of expert bodies like the RBI. Unless anything unconstitutional is done, there cannot be any interference from the Court. The Court held that no writ of mandamus could be issued to direct the Central Government or the RBI to provide relief to particular sectors over and above the sectors already identified. It is not for the Court to decide what should be the nature of financial reliefs that should be granted.
The Hon'ble Court put heavy reliance on the fact that the government had to spend in various different fields such as healthcare, medicine, providing food and shelter, taking care of migrants, etc. and many policies have been announced to mitigate the effect of the pandemic. Even the government has been facing a heavy financial burden coupled with non-recovery of GST. Government schemes such as "Garib Kalyan Package" and "Atmanirbhar Bharat Package" benefitted millions of Indians cutting across sectors and economic strata. Hence, it was wrong to say that the Central Government or the RBI had not done anything or had not offered any relief.
NO EXTENSION OF LOAN MORATORIUM
The Hon'ble Court observed that the extension of loan moratorium period for invocation of resolution mechanism forms part of the policy decisions. The Court also noted that sufficient time of 5 months was given to eligible borrowers to invoke the resolution mechanism. Therefore, the petitioners were not entitled to an extension of the period of moratorium and additional sector-specific reliefs.
The Court also vacated the interim order passed on September 3, 2020, which stayed the declaration of those accounts as NPAs, which were not NPAs as of August 31, 2020.
THE COURT REJECTED OTHER RELIEFS
The Court rejected the following reliefs as prayed for by various petitioners:
- Total waiver of interest during the moratorium period;
- To extend the period of moratorium;
- To extend the period for invocation of the resolution mechanism till 31.12.2020 provided under the 06.8.2020 circular4;
- sectorwise reliefs to be provided by the RBI; and
- The Central Government or RBI must provide for further reliefs over and above the relief packages already offered.
The Hon'ble Court partly allowed the petitions directing that there should not be any charging of compound interest or penal interest on any borrower during the period of moratorium.
CONCLUSION
The waiver of compound interest during the moratorium period would prove a boon to the borrowers desperately trying to bring their businesses back on track. However, if sources are to be believed then banks would have to shoulder a burden to the tune of Rs. 7,000-7,500 crores which may even go up to Rs. 13,000-14,000 crores across all lenders. Since the order does not specify any timeline for the settlement of compound interest, therefore, banks and other lending institutions can devise a mechanism of adjusting or settling it in a staggered manner. Meanwhile, all eyes are set on the declaration of NPAs by banks and how it impacts the banking industry as a whole.
Footnotes
1 https://rbidocs.rbi.org.in/rdocs/Notification/PDFs/NOTI186B27003E9DB3D4FB49BDDF955F4289D68.PDF
2 WRIT PETITION (C) NO. 476 OF 2020)
4 https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT168F87DBE0F71643B3B17BC8278108C16B.PDF
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