Supreme Court Holds Full Waiver of Interest on Interest in Loan Moratorium Case

Supreme Court Holds Full Waiver of Interest on Interest in Loan Moratorium Case

The Supreme Court (SC) on 23 March 2021, held in the case titled Small Scale Industrial Manufactures Association (Petitioner) v. Union of India & Ors. (Respondents), that any amount collected as compound interest shall be adjusted to the next installment payable instead of refunding it to the borrower.

The SC bench comprising of Justices Ashok Bhushan, Subhash Reddy, and MR Shah ruled that there shall be a waiver of interest on interest (compound interest) with respect to EMIs which were not paid by borrowers after availing of the loan moratorium scheme.

The Top Court ruled, "We are of the opinion that there shall be no interest on interest or compound interest or penal interest during the moratorium period and any amount already recovered under those heads shall be refunded by adjusting it in the next installment of the loan amount."

On 27 March 2020, the Reserve Bank of India (RBI) had announced a loan moratorium scheme that permitted temporary relief to lending institutions to borrowers on payment of EMIs falling between 1 March 2020 and 31 May 2020, due to the Covid-19 pandemic.

A batch of pleas was filed by the borrowers before the SC in the loan moratorium case for seeking a waiver from interest on interest regarding EMIs which were not paid by them after availing the loan moratorium scheme extended by the Reserve Bank of India (RBI) during March 1 to August 31 in view of the COVID-19 pandemic.

The RBI granted relief to borrowers considering the situation due to the pandemic and the consequent downturn in economic activities.

Later, the moratorium was extended till 31 August 2021. The move was intended to provide borrowers more time to pay EMIs amid the economic fallout due to COVID-19 pandemic-led nationwide lockdown, without being classified as a bad loan.

The petitioners had initially sought an extension of the moratorium up to 31 December 2020. One of the Petitioners named Vishal Tiwari who was an advocate by profession later sought an extension up to 31 March 2021, wherein it was stated that the current situation demands and necessitates the same.

The Centre opposed the waiver of interest during the moratorium period and stated that it is not practical, since this would burden the banks with an estimated amount of Rs. 6 lakh crore.

It took a stance regarding the issue of compound interest that it will be waived for loans up to Rs. 2 crore for six categories of borrowers. It stated that it would be in tune with the tradition of 'handholding small borrowers'.

The issue was raised before the Apex Court regarding charging interest and compound interest with respect to EMIs for the moratorium period.

The Court held that any amount collected as compound interest shall be adjusted to the next installment payable instead of refunding it to the borrower.

It also dealt with the issue of loan restructuring plan regarding accounts that did not default prior to the pandemic.

The companies and individuals, whose loan accounts were in default for not more than 30 days till 1 March 2020, were eligible for one-time restructuring. The Top Court had reserved its judgment in the matter on 17 December 2020.

The judgment passed by the Top Court stated, "It will not embark upon the inquiry whether public policy is wise or better policy can be evolved. Economic and fiscal policies are not amenable to judicial review and merely because a sector is not satisfied with a policy decision, cannot be the reason for interference unless there are malafides and arbitrariness in the said policy decision."