Contempt Plea In Supreme Court Against RBI Over Banks Allegedly Charging Interest-on-Interest For COVID Moratorium Period

A contempt petition has been filed in the Supreme Court against the Governor of the Reserve Bank of India in relation to the RBI's circular on the refund of the interest on interest charged by the Banks during the COVID loan moratorium period.

The petitioners contend that the RBI's circular issued on April 7, 2021 is not fully in accordance with the Supreme Court's judgment delivered on March 23, 2021, in Small Scale Industrial Manufactures Association(Regd) v Union of India, which directed that "there shall not be any charge of interest on interest/compound interest/penal interest for the period during the moratorium."

The circular issued by the RBI pursuant to the judgment directed all lending institutions to frame a policy "to refund/adjust the 'interest on interest' charged to the borrowers during the moratorium period, i.e. March 1, 2020 to August 31, 2020."  The petitioners submit that the RBI's circular is silent on refund of interest on interest collected from September 1st 2020 for the period of moratorium.

They argue that the RBI misquoted the Supreme Court's judgment allowing the lenders to collect the interest on interest which accrued during the moratorium period from September 1, 2020. They highlight that the use of the phrase "for the period during the moratorium" meant that no interest on interest could be charged subsequently also from September 1, 2020.

The petitioners stated :

"..the learned SC judges were categorical that no interest on interest could be charged for the period during the moratorium. This meant that interest on interest for unpaid dues accumulated during the moratorium period could not be charged within those 6 months of moratorium as well as later when the repayment cycle started after the moratorium ended. They reinforced this absolute bar on collection of compound interest/interest on interest/penal interest by being silent in the judgement regarding any end date for payment of interest by borrowers beyond which interest on interest could be collected by lenders for the enabled defaults during moratorium in exercise of their powers under section 34(11) of CPC."

The petitioners argue that the bankers have continued to capitalise interest for the default which occurred during the moratorium period. If capitalization needs to be reversed during the moratorium period because it would lead to interest on interest, then there is no question of continued capitalization of such interest after the moratorium in enabled defaults as interest on interest gets applied after the moratorium for no fault of the borrower inspite of the relief granted by SC .

"Although RESPONDENT (RBI) in is notification has mentioned relief only “during the moratorium period” RESPONDENTs silence on refund of interest on interest already collected from September 2020 till March 23rd 2021 which was the day of SC judgement is being construed as a license to violate the SC judgement which is the law of the land. Lenders not only violated the law of the land in not refunding this collected interest on interest by reversing the capitalization as on September 2020, but brazenly continued to collect such interest on interest even after the SC judgement misusing RESPONDENTs silence and failure of regulatory control and commiting a fraud on the nation," the plea stated.

The petition was drawn by Advocate Vishal Tiwari and filed through Aor Abhigya.

Case : Saravana Kodandapani v. Shaktikanta Das, Governor Reserve Bank of India