The Supreme Court on Tuesday stopped banks from charging compound interest (interest on interest) or penal interest on any loan, irrespective of the amount, during the moratorium period.
A three-judge Bench of Justices Ashok Bhushan, Subhash Reddy and M.R. Shah said the amount taken as compound interest or penal interest should be adjusted with future loan payments.
However, the court agreed with the Reserve Bank of India (RBI) that extending the date of the loan moratorium was “not viable”.
The court said judicial review over fiscal policies was limited and that it could not order specific financial reliefs. It questioned the rationale for limiting compound interest waiver to loans up to only ₹2 crore.
The government introduced a pay-back scheme on October 23 last year. The scheme waived off the difference in the compound interest and simple interest charged between March 1 and August 31 (moratorium period) for eight categories of loans worth up to ₹2 crore.
The eight categories were MSME, education, housing, consumer durables, credit card, auto, personal and consumption loans. The lending institutions included banking companies, public sector banks, cooperative banks, regional rural banks, all-India financial institutions, non-banking financial companies, housing finance companies registered with RBI and national housing banks.
In November last year, the court had directed the Centre to implement the pay-back scheme.
Borrowers’ pleas
However, borrowers had continued to press for an extension of the moratorium and also argued that the entire interest for the moratorium period should be scrapped. The petitioners also said the ₹2-crore pay-back scheme did not bring any relief to big borrowers reeling under the impact of the pandemic.
While reserving the case for judgment on December 17 last year, the Indian Banks Association had said the pleas made by the petitioners extended beyond the financial stress they supposedly suffered during the pandemic.
The Centre had said a complete waiver of interest would cripple the economy and banking sector.
The State Bank of India had pleaded in support of small depositors, who form the “backbone” of the banking system.
“Small depositors are faceless in these proceedings. It is not a case of borrowers versus bank. They are the backbone of the financial system. Banks have to give interest to these depositors. How can we leave them out?
“For every loan account, there are about 8.5 deposit accounts in the Indian banking system,” senior advocate Mukul Rohatgi had told the court on the last date of hearing.
The RBI had referred to clause 3 of its August 6 circular for ‘Resolution Framework for COVID-19-related Stress’ to point out that lending institutions, guided by their respective Board-approved policy, would prepare viable resolution plans for eligible borrowers. However, the benefits would only be provided for borrowers stressed on account of COVID-19.