Loan Moratorium Case| Supreme Court says no to total waiver of interest and extension of moratorium period but directs full waiver of compound interest

Supreme Court: In an important verdict concerning the Small Scale Industries, particularly the MSMEs, facing the financial strain due to the Corona Virus Pandemic, the 3-judge bench of Ashok Bhushan, R. Subhash Reddy and MR Shah*, JJ has held that there shall not be any charge of interest on interest/compound interest/penal interest from any of the borrowers who availed RBI’s loan moratorium scheme for the period between March 1, 2020 till August 31, 2020 during the COVID-19 lockdown.

The Court held that whatever the amount is recovered by way of interest on interest/compound interest/penal interest for the period during the moratorium, the same shall be refunded and be adjusted/given credit in the next instalment of the loan account.

The Court, however, refused to extend the moratorium period and also refused to grant the relief of total waiver of interest. 

Background

The Court was hearing a batch of petitions challenging the Covid-19 Regulatory Package notified by the RBI vide notification dated 27.03.2020 seeking total waiver of interest being charged on the loan amount during the moratorium period and also further extension of the moratorium period. It was also prayed before the Court that the relief packages which are offered by the UOI/RBI/Bankers/Lenders were not sufficient and some better and/or more reliefs should be offered.

However, on 23.10.2020 , the Central Government came out with a policy decision by which it is decided not to charge the interest on interest on the loans up to Rs. 2 crores.  However, such relief was restricted to these 8 categories.

It was Central Government’s case that if the Government were to consider waiver of interest on all the loans and advances to all classes and categories of borrowers corresponding to the six-month period for which the moratorium was made available under the relevant RBI circulars, the estimated amount is more than Rs. 6 lakh crores. “If the banks were to bear this burden, it would necessarily wipe out a substantial and a major part of their net worth, rendering most of the banks unviable and raising a very serious question mark over their very survival.” This was one of the main reasons why waiver of interest   was   not   even   contemplated and only payment of instalments was deferred.

After careful consideration and weighing all possible options, the Central Government decided to continue the tradition of handholding the small borrowers and, therefore, granted the relief of waiver of compound interest during the moratorium period, limited to the most vulnerable categories of borrowers.

Ruling 

Total Waiver of interest during moratorium period

The bankers/lenders have to pay the interest to the depositors and their liability to pay the interest on the deposits continue even during the moratorium period. They also have to bear the administrative expenses. Continue payment of interest to depositors is not only one of the most essential banking activities but it shall be a huge responsibility owed by the banks to crores and crores of small depositors, pensioners etc. surviving on the interest from their deposits. 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. All such welfare funds would depend on the income generated from their deposits for the survival of their members.

“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.”

Hence, 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.

Insufficient Relief packages

No   mandamus   can   be   issued   to   grant   some   more reliefs/packages. The court cannot interfere with the economic policy decisions on the ground that either they are not sufficient or efficacious and/or some more reliefs should have been granted. The Government might have their own priorities and the Government has to spend in various fields and in the present case like health, medicine, providing food etc.

Economic decisions are required to be taken keeping the larger economic scenario in mind and as such the Central Government has already given various reliefs and by providing various reliefs, they have already expanded huge financial burden. Further, the pandemic has caused stress to large and small businesses and the individuals who have lost jobs and livelihoods. By and large, everybody has suffered due to lockdown due to Covid-19 pandemic.

“No State or country can have unlimited resources to spend on any of its projects. That is why it only announces the financial reliefs/packages to the extent it is feasible.”

Extension of moratorium period

Extension of moratorium period is a policy decision.  Even otherwise, almost five months were available to eligible borrowers when circular dated 6.8.2020 was notified providing for a separate resolution mechanism for Covid19 related stressed assets.  Therefore, sufficient time was given to invoke the resolution mechanism.

Restriction of not charging interest on interest with respect to the loans up to Rs. 2 crores only for a few categories

In absence of any justification shown by the Government 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, the Court found such decision to be irrational.

It was also noted that the scheme dated 23.10.2020 granting relief/benefit of waiver of compound interest/interest on interest contains eligibility criteria and it provides that any borrower whose aggregate of all facilities with lending institution is more than Rs. 2 crores (sanctioned limit or outstanding amount) will not be eligible for ex-gratia payment under the said scheme.  Therefore, if the total exposure of the loan at the grant of the sanction is more than Rs. 2 crores, the borrower will be ineligible irrespective of the actual outstanding.

Giving an example, the Court explained

“if the borrower has been sanctioned a loan of Rs. 5 crores and has availed of the same, even though he might have repaid substantially bringing down the principal amount of less than Rs. 2 crores as on 29.02.2020, but because of the sanction of the loan amount of more than Rs. 2 crores, he will be ineligible. It also further provides that the outstanding amount should not be exceeded to Rs. 2 crores and for this purpose aggregate of all facilities with the lending institution will be reckoned.   Therefore, if a borrower, for example, MSME Category has availed and has outstanding of business loan of Rs. 1.99 crores and also has dues of its credit card of Rs. 1.10 lakhs, thereby making the aggregate to Rs. 2.10 crores, it stands ineligible. Therefore, the aforesaid conditions would be arbitrary and discriminatory.”

Further, the 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.”

Therefore, 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 by way 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.

[Small Scale Industries Manufacturers Association v. Union of India, 2021 SCC OnLine SC 246, decided on 23.03.2021]


*Judgment by: Justice MR Shah

Appearances before the Court by:

For Petitioners: Senior Advocate Ravindra Shrivastava, Dr. Abhishek Manu Singhvi, Kapil Sibbal

For Union of India: Solicitor General of India Tushar Mehta

For RBI: Senior Advocate V. Giri

For Indian Bank Association: Senior Advocate Harish Salve

For SBI: Senior Advocate Mukul Rohatgi

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