SC: “No merit in charging interest” for deferred loan payment instalments

The Supreme Court on June 17 noted that there is “no merit in charging interest” for deferred loan payment instalments during the moratorium period announced as a relief to customers amid the global pandemic.

The Centre cannot say that it is between the banks and the customers, observed the Supreme Court  while hearing petitions against the levy of interest on loan repayments, which were deferred for customers availing the six-month moratorium given by the Reserve Bank of India (RBI).

A bench comprising Justices Ashok Bhushan, Sanjay Kishan Kaul and M.R. Shah noted that the Central government cannot raise its hand in helplessness, and then say it is between the banks and the customers. The bench said if the Centre has announced the moratorium, it must ensure that the benefits are passed to the customers.

The observation from the Court came on the petitions filed by Gajendra Sharma who sought directions from the Court to declare the RBI notification to financial institutions to levy interest on loans during the moratorium period as ultra vires. According to the Petitioner, the RBI move created hardship to the petitioner who is a borrower and created hindrance and obstruction in ‘Right to Life’ guaranteed under Article 21 of the Indian Constitution.

Solicitor General Tushar Mehta, representing the Centre, contended before the Court that the interest waiver would have an adverse effect on the stability of the banks. Mehta argued that waiver of the interest may jeopardize the interest of the depositors. According to him, there were Rs. 133 lakh crores in deposits with banks and interest had to be paid on them and if interest is waived, then it may have a cascading effect on deposits.

The Supreme Court observed that the issue in the petitions was that the banks should not charge interest on interest during the moratorium period. The bench listed the matter for hearing in the first week of August, and in the meanwhile, the Centre and the RBI may examine the issues raised.

The Court also asked the Indian Banks’ Association to explore if the new norms or guidelines can be brought into shape. The bench observed that the period during pandemic cannot be equated as normal circumstances. Justice Kaul said the Court’s limited concern is to reduce the burden during this tough period.

Senior advocate Harish Salve, appearing for the Indian Banks’ Association, argued that waiving interest during this period will become a major issue for the banking sector.

Senior advocate Mukul Rohatgi, appearing for the State Bank of India, argued that the interest waiver cannot be issued like a free gift, and many borrowers have not availed it, as they know it is not interest free.

The bench replied that if the moratorium is allowed, the concerned should see it is availed by the customers. The bench noted that banks will go ahead and label these accounts as non-performing assets (NPAs), if the borrowers fail to pay interest on interest. The bench further noted that it is aware of the banks’ concern, and it is referring to waiver of interest on interest.

During the last hearing on June 4, the Court had observed that these are challenging times and it is a serious issue as on one hand moratorium is being granted and on the other hand, interest is charged on loans.

The RBI in an affidavit has informed the Supreme Court that waiving interest on interest during the moratorium period will adversely affect the health of the financial institutions. The RBI said that it does not consider prudent to go for a forced waiver of interest as it would risk the financial viability of banks and financial institutions.