Recently, the Apex Court has held 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) from March 1 to August 31 in view of the COVID-19 pandemic.
A moratorium period is a period during which the borrower is not obligated to make payments. In other words, during a moratorium period, the borrower is permitted to halt their payments.
As a relief measure for people in view of the coronavirus pandemic, the Reserve Bank of India (RBI) allowed a three-month moratorium on term-loan and credit card repayments. Lending institutions were directed to defer the EMIs of their customers opting for this moratorium scheme.
A moratorium is often affected in response to a crisis that disrupts normal routine. In the aftermath of earthquakes, floods, droughts or disease outbreaks, an emergency moratorium on some financial activities may be granted by a government or the central bank. It is lifted when normalcy returns.
Firstly, the Supreme Court has directed that there shall not be any charge of interest on interest/compound interest/penal interest for the period during the moratorium.
Secondly, the amount accumulated as compound/penal interest or interest on interest during the six-month moratorium on term loan EMIs should be given as “credit/adjusted in the next instalment of the loan account”.
The three-member bench of Justices Ashok Bhushan, R. Subhash Reddy, and M.R. Shah said, “additional interest in the form of a compound or penal is usually collected from loan defaulters. When the payment of installments had already been deferred during the moratorium, what was the need to burden borrowers, already reeling under the financial loss of a pandemic and lockdown
The judgment came as a relief for banks and lenders with the court lifting its nearly six-month bar on them from declaring accounts of borrowers as non-performing assets (NPAs). In October last year, the apex court had stopped banks and lenders from declaring accounts of borrowers as NPAs.
The judgment concluded that the government’s scheme to restrict the waiver of interest on loans worth only up to Rs.2 crore was irrational. This scheme, introduced in October, was limited to debts in MSME, education, housing, consumer durables, credit card, auto, personal, and consumption categories within the Rs.2 crore limit.
Justice Shah, who authored the judgment, said 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 crore only, and that too, restricted to the aforesaid (eight) categories. There is no rationale to restrict such relief.
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