Loan moratorium: SC sees ‘no merit’ in charging interest on unpaid interest

The Supreme Court, on Wednesday, observed that it saw “no merit” in charging interest on unpaid interest for deferred loan payment instalments during the six-month Covid-19 moratorium period, but asked the centre and the Reserve Bank of India to firm up their views on the issue and set the next hearing in the case for the first week of August. The apex court also asked Indian Banks Association (IBA) to see if new guidelines can be brought in force for the moratorium. The hearing, on a petition filed against the charging of interest on loans during the moratorium period, had representation from the Centre/Finance Ministry, Reserve Bank of India, State Bank of India, and the IBA.

“We realise that the Finance Ministry and the RBI need more time to revisit the issue of the loan moratorium,” the three-judge bench, headed by Justic Ashok Bhushan, said. Elucidating the centre’s viewpoint, Solicitor General Tushar Mehta, said that the banks have to pay interest to depositors, and therefore waiving of interest is not easy. “There are Rs 133 trillion in deposits with banks and interest has to be paid on them and the waiver will have a cascading effect,” Mehta said. ALSO READ: Coronavirus impact: SBI goes virtual to reach out to its customers He argued that complete waiver of interest during moratorium period might risk the financial stability of banks and this would put the interests of depositors in jeopardy, but said that the centre may consider a waiver on a case-by-case basis. “Once the moratorium is fixed then it should serve the desired purposes and we see no merit in charging interest on interest,” the bench, also comprising Justices S K Kaul and Justice M R Shah, orally observed and added that government should consider interfering in the matter as it cannot leave everything to banks. The bench was hearing a plea challenging levy of interest on loans during the moratorium period. The plea, filed by Agra resident Gajendra Sharma, has sought a direction to declare the portion of RBI’s March 27 notification as something beyond the RBI’s legal power or authority, to the extent that it charges interest on the loan amount during the moratorium period, which creates hardship to the petitioner being borrower and creates hindrance and obstruction in ‘right to life’ guaranteed by Article 21 of the Constitution of India”. ALSO READ: Coronavirus impact: SBI goes virtual to reach out to its customers The counsel representing banks association and SBI urged the bench that the matter should be deferred by three months. The counsel appearing for banks said that plea seeking waiver of interest during moratorium period is premature and the banks would have to consider the issue on a case to case basis. In the last hearing on June 12, the top court had asked the Finance Ministry and the RBI to hold a meeting within three days to decide on waiver of interest on interest for deferred payments of instalments for loans during moratorium period. The top court had observed that the question is not of waiver of complete interest for entire moratorium period but it is limited only to interest charged on interest by banks. Before that, on June 4, the bench had observed that the charging of interests by banks during the six-month moratorium period on term loans was ‘detrimental’. That came a day after the RBI submitted to the apex court that a waiver of interest on loans will impact the financial viability of the country’s financial sector and that the banks could forego about Rs 2 trillion in interest income if interests are waived off for the six months duration of the moratorium. TIMELINE – June 3: RBI tells SC that waiver of interest in moratorium period will lead to hit of Rs 2 trln for banks June 4: SC observes charging of interest during moratorium period ‘detrimental’ June 12: SC clarifies will limit petition to waiver of interest on unpaid interest June 17: SC sees ‘no merit’ in charging interest on unpaid interest, next hearing in August

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