The Supreme Court prohibits charging compound interest or criminal interest to any borrower during the loan default; Reject the extension of the moratorium


[Story updated with judgment]On Tuesday, the Supreme Court ordered that no compound interest, interest on interest, or criminal interest be charged on installments due during the loan forbearance period from March 1 to August 31 of last year to any borrower, regardless of the amount of the loan. loan. . If such interest has already been charged, it must be repaid to …

[Story updated with judgment]

The Supreme Court ruled Tuesday that there should be no charges of compound interest, interest on interest or penal interest in overdue installments during the loan default period from March 1 to August 31 of last year upon any borrower, regardless of the loan amount. If such interest has already been charged, it must be repaid to the borrower or adjusted for the next installments.

The bank noted that there is no basis in the Center’s policy to limit the benefit of the compound interest exemption only to certain categories of loans of less than Rs 2 million. Last year, the Center I had made a decision to allow exemption of interest on interest in eight specific categories for loans up to Rs 2 crore.

The Court noted that no justification has been shown to restrict the exemption from charging no interest on interest in respect of the loans up to Rs. 2 crore only and that also restricted to the mentioned categories.

Qualifying this policy of the Center as “arbitrary and discriminatory”, the Court ruled:

“… we are of the opinion that there will be no interest charge on the interest / compound interest / penal interest during the period during the default of any of the borrowers and whatever the amount that is recovered through the interest on the interest / compound interest / penal interest for the period during the moratorium, they will be reimbursed and adjusted / paid in the next installment of the loan account “.

The Court ordered:

“… it is ordered that there will be no interest charge on the interest / compound interest / penal interest during the period during the moratorium and any amount already recovered under the same title, that is, interest on the interest / penal interest / compound Interest will be reimbursed to interested borrowers and will be credited or adjusted within the next loan account term. “

In this regard, the Court observed that compound interest has the nature of a “penal interest”, as it can be punished in the event of the willful / voluntary failure of the borrower to pay the installments owed and payable. Once the RBI has allowed fee deterrence, the non-payment of the fee during the moratorium period cannot be said to be intentional and therefore there is no justification for charging. interest on interest / compound interest / penal interest for the period during the moratorium.

“… it is required to note that compound interest / interest on interest will be charged in the event of deliberate / intentional failure by the borrower to pay the installments owed and payable. Therefore, it has the nature of a criminal interest.. By notification dated 03/27/2020, the Government has provided for the deferral of contributions due and payable during the moratorium period. Once the payment of the fee has been deferred as by circular of 27.03.2020, the non-payment of the fee during the period of the moratorium cannot be considered intentional and, therefore, there is no justification to charge the interest on the interest / compound interest / penal interest during the period during the moratorium. “

The court refuses to grant a full waiver of interest

At the same time, the Court observed that it was not possible to order a complete waiver of interest during the loan default period, as banks have to pay interest to depositors, pensioners, etc. Banks also have to cover administrative expenses. There may be several category and sector specific welfare fund schemes that could survive and are implemented based on the interest earned on your deposits.

“Therefore, granting such relief from full interest exemption during the moratorium period would have far-reaching financial implications for the country’s economy as well as the lenders / banks. Hence, when a decision has been made aware of not waiving interest during the moratorium period and a political decision has been made to give relief to the borrowers by deferring the payment of installments and so many other reliefs are offered by the RBI and then by the bankers independently considering the Report submitted by the Kamath Committee composed of experts, the interference of the court is not necessary “, said the Court.

No extension of the loan moratorium

Furthermore, the Court rejected the petitioners’ prayer for the extension of the 6-month loan moratorium period granted by the Reserve Bank of India due to the COVID-19 pandemic. The court also rejected the other requested exemptions regarding the extension of the period for the invocation of the resolution mechanism and additional packages by sector.

The Court also annulled the provisional order approved on September 3 last year, which suspended the declaration of those accounts as NPAs, which were not NPAs as of August 31, 2020.

Limited scope of judicial review on economic policy

The Court held that in matters of economic policy, the scope of judicial review is very limited. Financial policy is an area in which courts must exercise caution, as judges are not experts. The way in which financial packages and support will be provided will be decided by the central government with the help and advice of expert bodies such as the Reserve Bank of India.

The courts cannot interfere even if a second view of politics is possible. The legality of the policy and not the soundness of the wisdom of the policy is subject to judicial review. The courts are not appellate forums or advisers regarding executive policy matters.

The ruling cited a string of Supreme Court precedents that emphasize the limited scope of judicial review, except in cases of flagrant illegality or bad faith.

The Court held that an injunction cannot be issued to order the Central Government or the Reserve Bank of India to provide relief to particular sectors in addition to the sectors already identified. It is not for the Court to decide what the nature of the financial allowances to be granted should be.

A bank that understands Judges Ashok Bhushan, R Subhash Reddy and MR Shah pronounced the verdict in the case Association of Small Scale Industrial Manufactures (Regd) v Union of India and related matters.

The Court had reserved the ruling on December 17 of last year after hearing from the petitioners, Centro, RBI and auditors.

The government also suffered economic losses during the pandemic

The judgment written by Judge MR Shah noted that the government also suffered due to an unprecedented pandemic and loss of GST revenue. The government has its own financial concerns. The pandemic affected all sectors, including the government. The government may have its own priorities, as it has to spend in various fields such as health, medicine, provision of food / shelter, organization of transport for migrants, etc.

“Even the government also suffered due to the lockdown, due to the unprecedented Covid19 pandemic and even lost the revenue in the form of GST. Still, the government appears to have presented various aid packages. The government has its own financial limitations. For Therefore, as such, a court order cannot be issued ordering the Government / RBI to announce / declare particular aid packages and / or declare a particular policy, more particularly when many complex problems will arise in the field of economics and what will be the consequences. overall effect on the economy of the country for which the courts have no experience “, said the trial.

It cannot be said that the Center has not taken action in the context of COVID19, the bank observed, after mentioning some of the aid packages announced by the Union government under the schemes ‘Arma Nirbhar Bharat’, ‘Garib Kalyan’ .

“When offering the financial aid packages, it is also required to consider and take into account the financial constraint and / or the financial burden of the government, which may be considered by experts and the government and courts are inexperienced to assess the burden financial “observed the Court.

The court rejects the following reparations

The Court rejected the following reparations requested by various petitioners:

(i) total waiver of interest during the moratorium period;

(ii) extend the moratorium period;

(iii) extend the term for invoking the resolution mechanism, namely, December 31, 2020 provided for in the circular of August 6, 2020;

(iv) that there will be sectoral relief provided by the RBI; and

(v) that the Central Government / RBI should provide some additional relief in addition to the aid packages already offered.

The Court admitted the petitions to the limited extent of stating that no compound interest, interest on interest, or penal interest should be charged to any borrower during the moratorium period.

Bottom

The Reserve Bank of India issued a Notice dated 03/27/2020 to allow banks and financial institutions to grant a 03-month moratorium on payments of all term loan installments due between March 1, 2020 and May 31, 2020. This period was subsequently extended. for another 3 months until August 31, 2020.

The petitioners had initially sought the extension of the moratorium until December 31. One of the petitioners, Attorney Vishal Tiwari, then requested an extension until March 31, 2021, stating that the current situation demands and requires the same.

On November 19, the Center had urged the Court not to intervene and provide further relief to borrowers under Article 32, as the Government was already “in the know.”

Attorney General Tushar Mehta told the Court that many plans and aid packages had been drawn up with technical experts and that the Court’s intervention on fiscal policy issues was unjustified.

On November 28, 2020, a bank led by Judge Ashok Bhushan I had ordered the Center to implement the decision made by the Center to waive interest in 8 specific categories of up to Rs 2 million.

The categories in which the Center and the RBI agreed to waive compound interest during the loan default period are:

(i) Loans for MSMEs up to Rs. 2 crore

(ii) Education loans up to Rs. 2 crore

(iii) Home loans up to Rs. 2 crore

(iv) Durable consumer loans up to Rs. 2 crore

(v) Credit card fees up to Rs. 2 crore

(vi) Auto loans up to Rs. 2 crore

(vii) Personal loans to professionals up to Rs. 2 crore

(viii) Consumer loans up to Rs. 2 crore

Case details

Case title: Small Scale Industrial Manufacturers Association (Regd) v Union of India and related cases.

Bench: Judges Ashok Bhushan, R Subhash Reddy and MR Shah

Appointment: LL 2021 SC 175

Click here to read / download the ruling

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