‘There is no merit in charging interest on interest’ for deferred loan payments: SC

On Wednesday, the Supreme Court said there is “no merit in charging interest on interest” for deferred loan payment installments during the moratorium period announced in the wake of the coronavirus (Covid-19) pandemic. The supreme court also asked the central government to step up and take a stance on the issue related to the charging of interest to EMIs during the six-month moratorium period granted during the pandemic.

The high court asked the central government and the Reserve Bank of India to review the matter and scheduled it for an additional hearing in the first week of August. Indian Banks Association (IBA) to see if new guidelines can be put into effect for the moratorium issue, the high court said.

Attorney General Tushar Mehta, during today’s hearing, said that banks have to pay interest to depositors and therefore waiving interest is not easy.

A bank headed by Judge Ashok Bhushan observed that once the moratorium is set, it should serve its intended purposes and the government should consider interfering in the matter, as it cannot leave everything to the banks.

“Once the moratorium is set, it should serve its intended purpose and we see no merit in charging interest on interest,” orally observed the court, which also includes Judges SK Kaul and Judge MR Shah.

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The court was hearing a statement by an Agra resident, Gajendra Sharma, who has requested instructions to declare the RBI portion of the March 27 notice “as ultra vires to the extent that it charges interest on the loan amount during the moratorium period, which creates difficulties for the applicant as a borrower and creates obstacles and obstructions in the ‘right to life’ guaranteed by article 21 of the Constitution of India. “

Attorney General Tushar Mehta, who appeared for the Center and the Reserve Bank of India, told the high court that giving up interest entirely will not be easy for banks as they have to pay interest to their depositors.

“There are 133 trillion rupees in bank deposits and interest must be paid on them and the exemption will have a cascading effect,” Mehta told the bank.

The bank, which published the matter for hearing in the first week of August for allowing the Center and the RBI to review the situation, asked the Banking Association of India to examine whether they can bring new guidance in the meantime on the issue of the loan moratorium.

Mehta argued that the complete waiver of interest during the moratorium period could put the financial stability of banks at risk and this would endanger the interests of depositors.

The lawyer representing the banking association and the State Bank of India (SBI) urged the court to postpone the matter for three months. The lawyer who appeared before the banks said that the request for a waiver of interest during the moratorium period is premature and that the banks would have to consider the matter on a case-by-case basis.

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On June 12, the high court had asked the Finance Ministry and the RBI to hold a meeting within three days to decide on the exemption of interest on deferred payments of loan installments during the moratorium period.

The higher court had observed that the issue is not the waiver of the full interest for the entire period of the moratorium, but is limited only to the interest charged by the banks on the interest.

The petitioner has requested instructions from the government and the RBI to provide loan repayment relief by not charging interest during the moratorium period.

On June 4, the high court had requested the Ministry of Finance’s response on the exemption of interest on loans during the moratorium period after the RBI said it would be unwise to opt for a forced exemption of interest that risks financial viability. of the banks.

The supreme court had said that there are two aspects under consideration in this matter: no interest payments on the loans during the moratorium period and no interest to be charged on the interest.

He had observed that these are difficult times and it is a serious problem, since on the one hand a moratorium is granted and, on the other, interest is charged on the loans.

On May 26, the high court had asked the Center and the RBI to respond to the guilty plea challenging the collection of interest on the loans during the moratorium period.

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The RBI in its response has told the court that it is taking all possible measures to provide relief regarding debt repayments due to the consequences of Covid-19, but does not consider it prudent to opt for a forced exemption of interest, risking the financial viability of banks that is mandated to regulate and endanger the interests of depositors.

The RBI said the March 27 circular announcing the moratorium was later amended on April 17 and May 23, whereby the moratorium period was extended for another three months, that is, from June 1. as of August 31, 2020 by paying all installments with respect to term loans (including agricultural term loans, retail and agricultural loans).

“It is presented that the regulatory waivers allowed by the Reserve Bank of India vide the mentioned circulars dated March 27, 2020 which were subsequently modified on April 17, 2020 and on May 23, 2020 were intended to mitigate the debt service burden caused by disruptions due to the Covid-19 pandemic and to ensure the continuity of viable businesses.

“Therefore, the regulatory package has, in essence, the nature of a moratorium / deferral and cannot be construed as a waiver,” he said.

The RBI had said that in order to ameliorate the difficulties borrowers face in paying the interest accrued during the moratorium period, on May 23 it had announced that with respect to working capital lines, lending institutions may, at At its discretion, convert the accrued interest for the deferral period until August 31, 2020, into a Term Loan with Financed Interest (FITL) that will be repayable no later than March 31, 2021.

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