SC waives interest on interest during moratorium period for all borrowers

The Supreme Court on Tuesday directed lenders not to charge interest on interest on the loan amount on which moratorium was granted between March and August 2020, for all borrowers. It clarified that lenders would have to either refund the amount charged or adjust for subsequent payments. Earlier, following another Supreme Court order, the government had already refunded the interest on interest to all borrowers with loans below Rs 2 crore.

The refund or the adjusted amount may not be a lot, according to bankers, as only a small percentage of loans that had opted for moratorium were restructured. “The impact on banks may not be high, given that only a small part of loans went for restructuring,” said Siddharth Purohit, analyst with SMC Global. “Overall it is a positive for banks as a complete interest waiver has been ruled out.”

State Bank of India (SBI), the country’s largest bank, had said applications for loan recast were received for Rs 18,125 crore, which was 10 per cent of the outstanding amount.

The Supreme Court, while delivering the judgment, said that the interest could not be waived off completely and decided against an extension of moratorium beyond six months. It said no direction could be issued to the government or the Reserve Bank of India (RBI) to announce any particular financial package or relief, and held that it could not issue directions to provide relief to particular sectors over and above others.

A Bench comprising Justices D Y Chandrachud, M R Shah and Sanjiv Khanna pronounced the judgment on the loan moratorium and waiver of interest.

“The Supreme Court judgment is welcome. The court has limited their scope to judicial review and not opined on the merits of policy,” said Mahesh Misra, chief executive, India Mortgage Guarantee Corporation. “Any other outcome would have created a potential moral hazard and also penalised conscientious borrowers. This creates the right precedent as well.”

After a nationwide lockdown was announced in March last year, the Reserve Bank of India had announced a loan repayment moratorium for three months. This was later extended by another three months until August. The RBI had also imposed a standstill clause on the loans under moratorium, as banks were not allowed to change their asset classification during the moratorium period.

In September, the Supreme Court had asked lenders not to classify loans which were standard as on August 31 as non-performing assets till further orders. With the latest order, there is now a clarity for lenders on the asset classification issue, as the apex court has ruled out any further moratorium.

Even if there was a stay on asset classification, banks had identified loans that would have slipped into the non-performing zone if not for the court’s September order. Such slippages, which are known as proforma slippages, were identified after the banking regulator asked banks informally for such an exercise and made required provisions, bankers said.

SBI’s gross non-performing asset (NPA) ratio, which was 4.77 per cent as on December 2020, would have been 5.44 per cent if there was no stay on asset classification.