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Supreme Court refuses to extend loan moratorium, orders banks not to charge interest on interest (read order)

Supreme Court said no compound interest charged from borrowers during loan moratorium period, amount already charged shall be credited or adjusted.

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The Supreme Court on Tuesday held that banks and non-bank financial organizations shall not charge interest on interest or compounded interest during the loan moratorium period irrespective of loan amount and the interest so collected should be adjusted. The Apex Court, however, refused to extend the period of moratorium.

A three-judge bench of Justices D.Y. Chandrachud, M.R. Shah and Sanjiv Khanna gave the verdict with Justice Shah pronouncing it on the batch of petitions seeking waiver of interest on interest during the loan moratorium period from March 1 to August 31, 2020 and the extension of loan moratorium period. The verdict on the batch of pleas had been reserved by the three-judge bench of Justices Ashok Bhushan, R. Subhash Reddy and M.R. Shah.

The Supreme Court held, “The Courts are not advisers to the executive on matters of economic policy. The Government also had suffered a loss during the pandemic. Therefore, no mandamus to be issued to Government, RBI etc to issues packages or extend the loan moratorium period.”

It said that the pandemic-affected all sectors and government had to take measures such as providing transport to migrants etc. Even government had no support during the pandemic and even GST loss that was incurred.

The Apex Court held that complete waiver of interest during the loan moratorium cannot be granted. It also rejected the prayer to extend loan moratorium period. It held that the court cannot issue directions to provide relief to particular sectors over and above the sectors identified by the government.

However, the Court said that there is no justification of not charging interest on interest for loans upto Rs 2 crore only. Therefore, the Court directed that there shall be no interest on interest or compounded interest during moratorium period irrespective of loan amount and the interest so collected should be adjusted.

The bench had reserved the verdict on December 17 last year after hearing the petitioners, the Centre, RBI and intervenors.

The petitioners advocate, Vishal Tiwari, had sought modification of the original prayers in the petition which related to the extension of moratorium period up to December 31 on the ground that the present situation demands and necessitates that the moratorium shall be extended and granted up to March 2021.

The Centre had filed an affidavit in the Court that it agreed to waive compound interest on loans for six categories of borrowers who secured loans of up to Rs 2 crore. After that various corporations and business Associations have demanded an extension of this benefit to borrowers who obtained loans of amounts Rs 2 crore.

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The Centre and RBI have opposed these requests. Solicitor General Tushar Mehta, representing the Centre, and senior advocate V. Giri representing RBI, said that compound interest on loans of up to Rs 2 crore was waived keeping in mind fiscal constraints and viability of banks. Any order to further extend the benefit to other borrowers will make banks unviable, which no economy like India will be able to sustain, the Centre and RBI had argued.

The RBI had filed an affidavit in Supreme Court last October stating that the moratorium on loan repayment cannot be extended beyond six months and requested the court to lift the stay on classifying defaulting accounts as non-performing assets (NPA) passed by the top court on September 3, 2020. The court had held, “The accounts which were not declared NPA till August 31, 2020 shall not be declared NPA till further orders.”

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