Supreme Court Bars Charging Compound Interest Or Penal Interest On Any Borrower During Loan Moratorium; Refuses Moratorium Extension

[Story updated with judgment]The Supreme Court on Tuesday directed that there should be no charging of compound interest, interest on interest or penal interest on the installments which were due during the loan moratorium period from March 1 to August 31 last year on any borrower, irrespective of the loan amount. If such interest has already been collected, it should be either refunded to the borrower or adjusted towards the next installments.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.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".In this regard, the Court observed that compound interest is in the nature of a "penal interest" as it is charegeable on deliberate/willful default by the borrower to pay the installments due and payable. Once the RBI has allowed the determent of installments, non-payment of the installment during the moratorium period cannot be said to be willful and therefore there is no justification to charge interest on interest/compound interest/penal interest for the period during the moratorium. "...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".Court refuses to grant total waiver of interestAt 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.No extension of loan moratoriumFurther, the Court rejected the petitioners' prayer for extension of the 6 month loan moratorium period granted by the Reserve Bank of India on account of COVID-19 pandemic. The bench also rejected the other reliefs sought regarding extension of the period for invocation of resolution mechanism and additional sector-wise packages.The Court also vacated the interim order passed on September 3 last...

Supreme Court Bars Charging Compound Interest Or Penal Interest On Any Borrower During Loan Moratorium; Refuses Moratorium Extension

Manu Sebastian

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