116 B, Mittal Towers, Nariman Point, Mumbai, India

The Supreme Court of India vide an order dated 23rd March 2021 waived interest on interest on the six-month moratorium announced by the Reserve Bank of India in 2020. This was in furtherance of the relief measure it offered to the borrowers in the form of EMI moratorium on all term loans for six-months between 1 March 2020 and 31 August 2020.

The moratorium was available on all loans including home loans, personal loans, education loans etc., and credit card dues. During the moratorium period, borrowers were not required to pay EMIs on their loans. The interest on the loan is not waived for this period and will continue to accrue on the outstanding amount. There is an additional interest on months for which moratorium on EMI was opted for either by increasing the tenure of the loan or EMI instalment amount. It is this additional interest that has been waived off by the Apex Court.

The petitioners also sought for waiver of interest on the outstanding portion of the term loans during the moratorium period, to extend the moratorium period till 31st December 2020 and to provide sector wise economic packages/reliefs. The contention of the petitioners was that the Court must take into consideration the magnitude of the disaster and mould the relief accordingly so as to help the distressed class of people which held some ground in the Court and was accompanied by a reading of Section 13 of the Act.

The Court while dismissing the above pleas opined that the said issues are required to be examined in the context of the larger financial constraints faced by the country in particular and the world in general. The various welfare schemes of different sectors that are strengthened by these regulations should be taken into consideration. The bench held “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.”

According to the rationale followed by the bench, any waiver has to be sanctioned by the Government and cannot come out of the system of the banks where credit is created from the depositor’s funds. The rationale holds ground for the contention that the court should restrict itself from concerning with intricacies of trade and commerce unless they are out rightly illegal. It is for the government to take policy decisions after calculating the issue from all angles.

The Court, therefore, found no reason to interfere in the decision of the government to waive the interest on interest during the moratorium period and reaffirmed the same. It opined that there shall not be any charge of interest on interest or compound interest or penal interest for the period during the moratorium and any amount already recovered under the same head, shall be refunded to the concerned borrowers and to be given credit/adjusted in the next instalment of the loan amount. The estimated cost of such waiver will be around Rs. 14,000 crores and will be borne by the Government of India.

Additionally, the bench also lifted the stay granted on classification of non-performing assets by banks. The interim relief granted to not declare accounts of respective borrowers as NPA stands vacated from the date of the order of the Supreme Court. However, the Court was firm to decline and not interfere with the other pleas like complete waiver of the interest on moratorium, extension of the moratorium and the provision of sector wise relief. It was of the opinion that “merely because some class/sector may not be agreeable and/or satisfied with such packages/policy decisions, the courts, in exercise of the power of judicial review, do not ordinarily interfere with policy decisions, unless such policy could be faulted on the ground of malafide, arbitrariness, unfairness, etc”.

The decision is expected to remove uncertainties regarding further extension of the moratorium, asset classification and NPA accounting. It is bound to go a long way in helping the recovering borrowers and lessen the financial burden on them. The prudent and fair approach taken by the Court has been applauded by various field experts and anything other than the current approach would have impacted the banking system severely.