India's Supreme Court waives compound interest on ALL loans put under moratorium due to COVID-19 pandemic

India's Supreme Court waives compound interest on ALL loans put under moratorium due to COVID-19 pandemic
Supreme Court of IndiaBCCL

  • Banks in India cannot charge interest on the interest accrued during the period for which borrowers were allowed to pause repayments.
  • The Reserve Bank of India (RBI) had allowed borrowers to defer their payments in the wake of the economic crisis following the COVID-19 pandemic.
  • However, while the repayments had paused, interest continued to be accrued to the banks, and hence, the borrower would have had to shoulder the entire burden eventually.
  • With this ruling, the top court has also said that any amount collected as interest on interest, shall be refunded to the borrower.
  • Check out the latest news and updates on Business Insider.
India’s apex court has ordered the waiver of interest on interest on all loans under moratorium, not just those amounting to ₹2 crore.

“We are of the opinion that there shall be no interest on interest or compensation interest during the moratorium period irrespective of loan amount. Any such amount collected shall be refunded,” said Justice MR Shah according to Bar & Bench. He added that if a refund is not possible, the interest on interest collected shall be adjusted in the next instalment payable.

However, the court did suggest that compound interest may be charged in cases of deliberate and wilful defaulters.
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The court also declared that there will be no extension of the moratorium period or the offer to restructure loans.

Supreme Court turns down requests for waiver of total interest and sector-specific relief
While the Supreme Court has waived interest on interest for all loans, irrespective of the amount, borrowers will still have to pay the interest on the principal amount even during the moratorium period.

The bench explained that the waiver of total interest is not possible since banks have to pay interest to account holders and pensioners.

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It added that if any sector-specific relief has to be given, it will be given by the RBI. Further reliefs over and above the packages already offered won’t come by way of the Supreme Court’s judgement.

The power sector, for instance, wanted the court to ‘plug’ the loopholes in RBI’s restructuring scheme. Similar requests were made by the real estate sector, educational institutions, mall owners and other industries that bore the brunt of the COVID-19 pandemic.

The court explained that it does have the necessary expertise to interfere in these matters. The economic packages and relief that are to be provided fall within the scope of the RBI and the government.

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"The Court will not embark upon an inquiry on 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," said the Supreme Court’s order.

The story so far
In March last year, the RBI had announced that borrowers impacted by the COVID-19 pandemic are eligible to defer the interest payments on their loans until 31 May 2020.

The move was intended to provide relief to individuals and businesses who were impacted by the COVID-19 pandemic without turning into a bad loan or non-performing asset (NPA).

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As the pandemic continued and economic growth contracted further, the RBI extended the moratorium period to 31 August 2020.

However, as they say — there’s no such thing as a free lunch. Banks were ready to defer interest payments, but were charging compound interest on the delay, adding to the burden of borrowers in the long run.

After outcry from the public, the Indian government then issued a notice waiving the interest on loans of up to ₹2 crore for eight categories of borrowers. But, this did not hit the right note with borrowers who were not covered within this net leading petitioners to file please with the Supreme Court for further relief.

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