[Breaking] Compound Interest During Moratorium Period Can Be Waived For MSME & Personal Loans Up to Rs. 2 Crore: Centre Tells SC [Read Affidavit]

The Union of India submitted that is has decided to continue the "tradition of handholding the small borrowers" and therefore, it has waived interest for the said period for the most "vulnerable category of borrowers" viz.:

• MSME loans up to Rs. 2 crore
• Education loans up to Rs. 2 crore
• Housing loans up to Rs. 2 crore
• Consumer durable loans up to Rs. 2 crore
• Credit card dues up to Rs. 2 crore
• Auto loans up to Rs. 2 crore
• Personal loans to professionals up to Rs. 2 crore
• Consumption loans up to Rs. 2 crore

"In other words, any individual/entity whose loan amount is more than Rs. 2 crore will not be eligible for waiver of the compounding of interest, which shall be confined to only the above referred categories of borrowers," the Government said.

The submission has come in the plea(s) seeking extension of the Covid19 induced loan moratorium & waiver of accruing interest. The action of imposition of interest during the moratorium period is "completely devastating, wrong and in a way has taken away the benefit of imposing moratorium", the Petitioner had contended.

In the last hearing on September 10, the Government had informed a bench of Justices Ashok Bhushan, R. Subhash Reddy & MR Shah that that an Expert Committee at the highest level had been constituted in order to take a decision on these issues. Solicitor General Tushar Mehta sought two weeks' time in order to place on record a comprehensive affidavit in this regard.

Inter alia, the Government has assured there shall be a relaxation from recognition of default due to the moratorium and any account becoming Non-performing (NPA) due to the bank's or any other delay, need not suffer from being labelled as NPA.

Background:

The bench was hearing a plea filed by an Agra resident Gajendra Sharma, who has sought a direction to declare the portion of the RBI's March 27 notification "as ultra vires to the extent it charges interest on the loan amount during the moratorium period, which create hardship to the petitioner being borrower and creates hindrance and obstruction in 'right to life' guaranteed by Article 21 of the Constitution of India".Earlier, the Supreme Court had said there was "no merit in charging interest on interest" for deferred loan payment instalments during the moratorium period announced in wake of the COVID-19 pandemic & that once moratorium is fixed, it should serve the desired purposes and the government should consider interfering in the matter as it could not leave everything to banks.

The petitioner has sought a direction to the government and the RBI to provide relief in repayment of loan by not charging interest during moratorium period.

On June 4, the top court had sought the Finance Ministry's reply on waiver of interest on loans during the moratorium period after the RBI said it would not be prudent to go for a forced waiver of interest risking financial viability of the banks.

The apex court had said there are two aspects under consideration in this matter - no interest payment on loans during the moratorium period and no interest to be charged on interest.

It had observed that these are challenging times and it is a serious issue as on the one hand, moratorium is granted and on other hand, interest is charged on loans.

On May 26, the top court had asked the Centre and the RBI to respond to the plea challenging levy of interest on loans during the moratorium period.

The RBI in its reply has told the court that it is taking all possible measures to provide relief with regard to debt repayments on account of the fallout of COVID-19 but it does not consider it prudent to go for a forced waiver of interest, risking the financial viability of the banks it is mandated to regulate, and putting the interests of the depositors in jeopardy .

The RBI said the March 27 circular announcing moratorium was later modified on April 17 and May 23 by which the moratorium period was extended by another three months that is from June 1 to August 31, 2020 on payment of all instalments in respect of term loans (including agricultural term loans, retail and crop loans).

"It is submitted that regulatory dispensations permitted by the Reserve Bank of India vide the aforesaid circulars dated March 27, 2020 which subsequently stood modified on April 17, 2020 and May 23, 2020 were with the objective of mitigating the burden of debt servicing brought about by disruptions on account of COVID-19 pandemic and to ensure the continuity of viable businesses. Therefore, the regulatory package is, in its essence, in the nature of a moratorium/deferment and cannot be construed to be a waiver,"s

The RBI had said that in order to ameliorate difficulties faced by borrowers in repaying accumulated interest for the moratorium period, on May 23 it had announced that in respect of working capital facilities, lending institutions may, at their discretion, convert the accumulated interest for the deferment period up to August 31, 2020, into a funded interest term loan (FITL) which shall be repayable not later than March 31, 2021.

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