The Court held that any amount collected as compound interest shall be adjusted to the next installment payable instead of refunding it to the borrower.
The Supreme Court on Tuesday ruled that there shall be waiver of interest on interest (compound interest) with respect to EMIs which were not paid by borrowers after availing the loan moratorium scheme extended by Reserve Bank of India (RBI) during March 1 to August 31 in view of the COVID-19 pandemic (Small Scale Industrial Manufactures Association v. Union of India).
All borrowers will be eligible for such waiver irrespective of the amount of loan availed, the Court said.
“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 in the next instalment of the loan account,” the Court ordered.
The Court effectively set aside the direction of the Central government and RBI to restrict waiver of interest on interest to certain categories of borrowers who had availed loans of less than Rs. 2 crores.
“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,” the Court said.
The Court, therefore, partly allowed the petitions which had challenged the decision of the Centre and RBI to restrict waiver of interest on interest to those borrowers who had availed loans of less than Rs. 2 crores.
The following prayers made by borrowers were, however, rejected by the top court.
– total waiver of interest during the moratorium period;
– to extend the period of moratorium;
– to extend the period for invocation of resolution mechanism;
– prayer for sector wise reliefs provided by RBI;
– further reliefs over and above the packages already offered.
The Court in its judgment also underscored that the extent and manner in which economic packages and reliefs are to be provided falls within the scope of the executive and the Court does not have expertise to deal with the same.
It will, therefore, ordinarily not engage in exercising judicial review over matters of economic and fiscal policies.
“The Court will not embark upon inquiry whether public policy is wise or better policy can be evolved. Economic and fiscal policies are not amenable to judicial review and merely because a sector is not satisfied with a policy decision, cannot be reason for interference unless there are malafides and arbitrariness in the said policy decision,” the judgment said.
The judgment was delivered by a Bench of Justices Ashok Bhushan, R Subhash Reddy and MR Shah in a batch of petitions filed by companies, individuals and business associations challenging the decision of the Centre and RBI to charge interest during the moratorium period and restrict waiver of interest on interest to eight categories of borrowers who had availed loans of less than Rs. 2 crore.
DSK Legal acted for CREDAI MCHI in the matter.
The Reserve Bank of India (RBI) had on March 27 announced a loan moratorium scheme, which allowed lending institutions to grant a temporary relief to borrowers on payment of installments of term loans falling due between March 1, 2020, and May 31, 2020, due to the pandemic and the consequent downturn in economic activities.
The move was intended to provide borrowers more time to pay EMIs amid the economic fallout due to COVID-19 pandemic-led nationwide lockdown, without being classified as bad loan.
Later, the moratorium was extended till August 31, 2020.
However, the issue of charging interest and compound interest with respect to EMIs for the moratorium period came to be raised before the Supreme Court.
The Centre and RBI then came up with a scheme in response to the concerns raised.
Waiver of interest during moratorium period was not agreed upon by the Centre which said that it is not practical, since this would burden the banks with an estimated amount of Rs. 6 lakh crores.
Regarding, compound interest, the government took a stance that it will be waived for loans up to Rs. 2 crores for six categories of borrowers. This, the government said, would be in tune with the tradition of “handholding small borrowers.
This decision was assailed by various borrowers who fell outside the eligibility bracket.
Also under challenge before the Court was the loan restructuring plan with respect to accounts that did not default prior to the country being hit by the pandemic.
Only those companies and individuals whose loans accounts were in default for not more than 30 days as on 1 March, 2020, were eligible for one-time restructuring.
The Court had reserved its judgment in the matter on December 17.
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