Compound Interest In Nature Of Penal Interest; No Justification For Charging It Once RBI Has Allowed Loan Moratorium : SC
The Supreme Court has observed that there is no justification for charging compound interest or penal interest during the period of loan moratorium which was allowed by the Reserve Bank of India from March 1 to August 31 last year on account of the COVID19 pandemic.The Court observed that compound interest is chargeable on wilful or deliberate default by the borrower to pay the due...
The Supreme Court has observed that there is no justification for charging compound interest or penal interest during the period of loan moratorium which was allowed by the Reserve Bank of India from March 1 to August 31 last year on account of the COVID19 pandemic.
The Court observed that compound interest is chargeable on wilful or deliberate default by the borrower to pay the due installments. So, when the installments have been deferred based on the moratorium declared by the RBI, the non-payment of installments cannot be termed as willful. Therefore, there is no justification in charging compound interest, which is in the nature of a penal interest, during the moratorium period, the Court said.
The Supreme Court made these observations while disposing off a batch of petitions which sought various reliefs such as waiver of interest, extension of moratorium etc.
The judgment delivered by a bench comprising Justices Ashok Bhushan, R Subhash Reddy and MR Shah observed :
"...it is required to be noted that compound interest/interest on interest shall be chargeable on deliberate/willful default by the borrower to pay the installments 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, non-payment 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".
No Rationale in Centre's policy to limit waiver of interest to loans below Rs 2 Crores
The bench observed that there is no rationale in the Centre's policy to limit the benefit of waiver of compound interest only to certain loan categories less than Rs Two Crores. Last year, the Centre had taken a decision to allow waiver of interest on interest in eight specified categories for loans up to Rupees 2 crores.
The Court observed that 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.
The bench observed that as per the Centre's policy, 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.
The judgment authored by Justice MR Shah cited an example as follows :
"For Example, if the borrower has been sanctioned a loan of Rs. 5crores 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".
The Centre's policy further provided that the outstanding amount should not exceed Rs. 2 crores and for this purpose aggregate of all facilities with the lending institution will be reckoned.
Therefore, the Court said, 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.
Terming this policy of the Centre to be "arbitrary and discriminatory", the Court ruled :
"...we are 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 byway 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".
The Court directed :
"...it is 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".
Court refuses to grant total waiver of interest
At the same time, the Court observed that it was not possible to order complete waiver of interest during the loan moratorium period, as the banks have to pay interest to depositors, pensioners etc. Banks have to meet administrative expenses as well. 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.
"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 installments 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", the Court said.
The categories in which the Centre and the RBI agreed to waive compound interest during the loan moratorium period are :
(i) MSME loans up to Rs. 2 crore
(ii) Education loans up to Rs. 2 crore
(iii) Housing loans up to Rs. 2 crore
(iv) Consumer durable loans up to Rs. 2 crore
(v) Credit card dues up to Rs. 2 crore
(vi) Automobile loans up to Rs. 2 crore
(vii) Personal loans to professionals up to Rs. 2 crore
(viii) Consumption loans up to Rs. 2 crore
Case Details
Case Title : Small Scale Industrial Manufactures Association(Regd) v Union of India and connected cases.
Bench : Justices Ashok Bhushan, R Subhash Reddy and MR Shah
Citation : LL 2021 SC 175