Interest During Loan Moratorium: Centre Constitutes Expert Committee

The Ministry of Finance on Thursday constituted an Expert Committee to study the issues related to waiver of interest and interest on interest during loan moratorium.

The Centre had today told the Supreme Court today that an expert committee will look into various issues raised in the ongoing hearing in the matter of Gajendra Sharma Vs. UoI and Others

The Expert Committee comprises:

(i) Shri Rajiv Mehrishi, former CAG of India - Chairperson

(ii) Dr. Ravindra H. Dholakia, former Professor, IIM Ahmedabad & ex- Member, Monetary Policy Committee of Reserve Bank of India

(iii) Shri B. Sriram, Former Managing Director, State Bank of India & IDBI Bank

The terms of reference of the committee shall be as under:

(i) Measuring the impact on the national economy and financial stability of waiving of interest and waiving of interest on interest on the COVID-19 related moratorium

(ii) Suggestions to mitigate financial constraints of various sections of society in this respect and measures to be adopted in this regard

(iii) Any other suggestions/observations that may be necessary given the current situation.

The committee will submit its report within one week. State Bank of India will provide secretarial support to the committee. The Committee may consult banks or other stakeholders, as deemed necessary, for the purpose.

Based on the submission of the Centre before the apex court on Thursday, a bench headed by Justice Ashok Bhushan extended the earlier interim order passed on September 3 which stated that status quo with respect loans not classified as NPAs as on August 31 should be maintained.

The case in Supreme Court

The Supreme Court is hearing a bunch of petitions which challenge the RBI's March 27 notification which declared 3-month loan moratorium to the extent it allows the accrual of interest on the deferred installments.

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, the 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,"

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.

The banking institutions have opposed the petitions stating that waiver of interest will prejudicially affect the banking sector.