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March 23, 2021

Supreme Court orders full waiver of interest on interest in Loan Moratorium case

by CA Jessica Nagaonkar in Legal Court Judgement

Supreme Court orders full waiver of interest on interest in Loan Moratorium case

The economic impact of the 2020 coronavirus pandemic in India has been largely disruptive. The lockdown though necessary has led to a disastrous impact on the economy. The Government of India announced a variety of measures to tackle the situation, from food security and extra funds for healthcare and for the states, to sector related incentives and tax deadline extensions. The RBI too had announced various measures to the curb the economic impact of the pandemic.

The Reserve Bank of India (RBI) announced an extension of the moratorium on term loan EMIs by three months, i.e., till August 31, 2020 in a press conference dated May 22, 2020. The earlier three-month moratorium on the loan EMIs was ending on May 31, 2020. This makes it a total of six months of moratorium on loan EMIs (equated monthly instalment) starting from March 1, 2020 to August 31, 2020. The extension of the three-month moratorium on repayment of term loans means that borrowers will not have to pay their loan EMI instalments during such period as prescribed by the RBI. The Supreme Court (SC) heard petitions seeking an extension of the moratorium period on repayment of loans and to waive off the interest on interest on the loan amount in view of the COVID-19 pandemic.

Reliefs sought in the respective petitions could be summarized as under:

  • a complete waiver of interest or interest on interest during the moratorium period;
  • there shall be sector wise relief packages to be offered by the Union of India and/or the RBI and/or the Lenders;
  • moratorium to be permitted for all accounts instead of being at the discretion of the Lenders;
  • extension of moratorium beyond 31.08.2020;
  • whatever the relief packages are offered by the Central Government and/or the RBI and/or the Lenders are not sufficient looking to the impact due to Covid­19 Pandemic and during the lockdown period due to Covid­19 Pandemic;
  • the last date for invocation of the resolution mechanism, namely, 31.12.2020 provided under the 6.8.2020 circular should be extended.

Observations of the SC on relief sought of waiver of interest

  • With the limited scope of judicial review on the policy decisions affecting the economy and/or it might have financial implications on the economy of the country, the reliefs and submissions stated hereinabove are required to be considered.
  • Whether there shall be a waiver of interest during the moratorium period or whether there shall be sector wise relief packages and/or RBI should have issued directions which are sector specific and addressing such sector specific issues and/or whether the moratorium period should be extended beyond 31.08.2020 or the last date for invocation of the resolution mechanism, namely, 31.12.2020 provided in the 6.8.2020 circular should be extended are all in the realm of the policy decisions.
  • Not only that, if such reliefs are granted, it would seriously affect the banking sectors and it would have far reaching financial implications on the economy of the country.
  • Now so far as the relief sought of waiver of interest during the moratorium period is concerned, it is required to be noted that the bankers/lenders have to pay the interest to the depositors and their liability to pay the interest on the deposits continue even during the moratorium period.
  • There shall be administrative expenses also required to be borne by the bankers/lenders.
  • Continue payment of interest to depositors is not only one of the most essential banking activities but it shall be a huge responsibility owed by the banks to crores and crores of small depositors, pensioners etc. surviving on the interest from their deposits.
  • There may be several welfare funds schemes, category specific and sector specific which might be surviving and are implemented on the strength of the interest generated from their deposits.
  • All such welfare funds would depend on the income generated from their deposits for the survival of their members.
  • Therefore, to grant such a relief of total waiver of interest during the moratorium period would have a far-reaching financial implication in the economy of the country as well as the lenders/banks.
  • Therefore, when a conscious decision has been taken not to waive the interest during the moratorium period and a policy decision has been taken to give relief to the borrowers by deferring the payment of instalments and so many other reliefs are offered by the RBI and thereafter by the bankers independently considering the Report submitted by Kamath Committee consisting of experts, the interference of the court is not called for.

Observations of SC on submission of the petitioners that the RBI should have issued directions which are sector specific

  • The Committee headed by Shri K.V. Kamath had gone into such sector specific issues and gave its recommendations.
  • The recommendations of the Kamath Committee have been substantially accepted by the RBI in its circular dated 7.9.2020 which provides for separate threshold for 26 sectors including power, real estate and construction.
  • Even otherwise, it is required to be noted that every sector might have suffered differently and therefore it will not be possible to provide sector specific/sector wise reliefs.
  • The petitioners cannot pray for sector specific relief by either waiver of interest or restructuring by way of present proceedings under Article 32 of the Constitution of India and the question of such financial stress management measures requires examination and consideration of several financial parameters and its impact.

Observations of the SC on the submission of the petitioners that it should not have been left to the bankers and the Government/RBI must intervene and provide further reliefs

  • It is required to be noted that as such the bankers are commercial entities and since the customer profile, organizational structure and spread of each lending institution is widely different from others, each lending institution is best placed to assess the requirements of its customers and therefore, the discretion was left to the lending institutions concerned.
  • Any borrowing arrangement is a commercial contract between the lender and the borrower.
  • RBI and/or the Union of India can provide for broad guidelines while recommending to give the reliefs.

Observations of SC on submission of the petitioners that the relief packages which are offered by the UOI/RBI/Bankers/Lenders are not sufficient and some better and/or more reliefs should be offered

  • It is not within the judicial scope of the courts to issue such directions. No mandamus can be issued to grant some more reliefs/packages.
  • SC cannot interfere with the economic policy decisions on the ground that either they are not sufficient or efficacious and/or some more reliefs should have been granted.
  • The Government might have their own priorities and the Government has to spend in various fields and in the present case like health, medicine, providing food etc.
  • Central Government has already given various reliefs and by providing various reliefs, they have already expanded huge financial burden.
  • Pandemic has caused stress to large and small businesses and the individuals who have lost jobs and livelihoods. By and large, everybody has suffered due to lockdown due to Covid­19 pandemic.
  • Government has also suffered due to non­recovery of GST.
  • It cannot be said that the Central Government and/or the RBI have not done anything and/or have not offered any reliefs whatsoever.
  • While offering the financial relief packages, the financial constraint and/or financial burden on the government is also required to be considered and borne in mind, which can be considered by the experts and the government and the courts have not expertise to assess the financial burden.
  • From the various steps/measures/policy decisions/packages declared by the Union of India/RBI and the bankers, it cannot be said that the UOI and/or the RBI have not at all addressed the issues related to the impact of Covid­19 on the borrowers.
  • As such, none of the petitioners have specifically challenged the various circulars/policy decisions taken by the UOI/RBI.
  • From the submissions made by the learned counsel appearing for the respective parties, it appears that the borrowers want something more than the reliefs announced.
  • Merely, since the reliefs announced by the UOI/RBI ither may not be suiting the desires of the borrowers, the reliefs/policy decisions related to Covid­19 cannot be said to be arbitrary and/or violative of Article 14 of the Constitution of India.
  • It cannot be said that any of the fundamental rights guaranteed under the Constitution are infringed and/or violated. Economic decisions are required to be taken keeping the larger economic scenario in mind.

Observations of SC on the submission that the moratorium period should be extended and/or the last date for invocation of the resolution mechanism namely 31.12.2020 provided under the 06.08.2020 circular should be extended are all in the realm of policy decisions.

  • Even otherwise, almost five months were available to eligible borrowers when circular dated 6.8.2020 was notified providing for a separate resolution mechanism for Covid19 related stressed assets.
  • Therefore, sufficient time was given to invoke the resolution mechanism. Therefore, the petitioners shall not be entitled to any reliefs, namely:
    1. total waiver of interest during the moratorium period;
    2. to extend the period of moratorium;
    3. to extend the period for invocation of the resolution mechanism, namely 31.12.2020 provided under the 6.8.2020 circular;
    4. that there shall be sector wise reliefs provided by the RBI
    5. that the Central Government/RBI must provide for some further reliefs over and above the relief packages already offered which, as observed hereinabove, can be said to be in the realm of the economic policy decisions and for the reasons stated hereinabove and as observed hereinabove granting of any such reliefs would have a far-reaching financial implication on the economy of the country.
  • It appears, whatever best can be offered has been offered for the different fields and to the common people as well as those persons who are affected due to Covid­10 pandemic.

Observations of SC on relief/prayer not to charge the penal interest / interest on interest / compound interest during the moratorium period

  • The Central Government has come out with a policy decision subsequently by which it is decided not to charge the interest on interest on the loans up to Rs. 2 crores. However, such relief is restricted to the following categories:
    1. MSME loans up to Rs.2 crore
    2. Education loans up to Rs.2 crore
    3. Housing loans up to Rs.2 crore
    4. Consumer durable loans up to Rs.2 crore
    5. Credit card dues up to Rs.2 crore
    6. Auto loans up to Rs.2 crore
    7. Personal loans to professionals up to Rs. 2 crore
    8. Consumption loans up to Rs.2 crore
  • There is no justification shown to restrict the relief of not charging interest on interest with respect to the loans up to Rs. 2 crores only and that too restricted to the aforesaid categories.
  • What are the basis to restrict it to Rs. 2 crores are not forthcoming.
  • Therefore, as such, there is no rational to restrict such relief with respect to loans up to Rs. 2 crores only.
  • Even otherwise, it is required to be noted that the scheme dated 23.10.2020 granting relief/benefit of waiver of compound interest/interest on interest contains eligibility criteria and it provides that any borrower whose aggregate of all facilities with lending institution is more than Rs. 2 crores (sanctioned limit or outstanding amount) will not be eligible for ex­gratia payment under the said scheme.
  • Therefore, if the total exposure of the loan at the grant of the sanction is more than Rs. 2 crores, the borrower will be ineligible irrespective of the actual outstanding.
  • For Example, if the borrower has been sanctioned a loan of Rs. 5 crores and has availed of the same, even though he might have repaid substantially bringing down the principal amount of less than Rs. 2 crores as on 29.02.2020, but because of the sanction of the loan amount of more than Rs. 2 crores, he will be ineligible.
  • It also further provides that the outstanding amount should not be exceeded to Rs. 2 crores and for this purpose aggregate of all facilities with the lending institution will be reckoned.
  • Therefore, if a borrower, for example, MSME Category has availed and has outstanding of business loan of Rs. 1.99 crores and also has dues of its credit card of Rs. 1.10 lakhs, thereby making the aggregate to Rs. 2.10 crores, it stands ineligible.
  • Therefore, the aforesaid conditions would be arbitrary and discriminatory.
  • Even otherwise, it is required to be noted that compound interest/interest on interest shall be chargeable on deliberate/wilful default by the borrower to pay the instalments due and payable. Therefore, it is in the nature of a penal interest.
  • By notification dated 27.03.2020, the Government has provided the deferment of the installments due and payable during the moratorium period. Once the payment of installment is deferred as per circular dated 27.03.2020, non­payment of the installment during the moratorium period cannot be said to be willful and therefore there is no justification to charge the interest on interest/compound interest/penal interest for the period during the moratorium.

Therefore, SC was of the opinion that there shall not be any charge of interest on interest/compound interest/penal interest for the period during the moratorium from any of the borrowers and whatever the amount is recovered by way of interest on interest/compound interest/penal interest for the period during the moratorium, the same shall be refunded and to be adjusted/given credit in the next instalment of the loan account.

However, it was also directed that there shall not be any charge of interest on interest/compound interest/penal interest for the period during the moratorium and any amount already recovered under the same head, namely, interest on interest/penal interest/compound interest shall be refunded to the concerned borrowers and to be given credit/adjusted in the next instalment of the loan account. All these petitions are partly allowed to the aforesaid extent only and as observed for the reliefs, the petitions are dismissed. Interim relief granted earlier not to declare the accounts of respective borrowers as NPA stands vacated.

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