The SC said that there is no merit in charging interest on interest for deferred loan payment instalments during the moratorium period. A bench headed by Justice Ashok Bhushan along with Justices Sanjay Kaul and M.R. Shah presided asked the Centre and RBI to review the issue.
Facts of the Case
The bench, comprising Justices Sanjay Kaul and M R Shah was hearing a plea. It was filed by Gajendra Sharma against the levy of interest on loan repayments deferred availing the six-month moratorium. The Reserve Bank of India allowed it. The main issue in the plea was that banks should not charge interest during the moratorium period. They should at least refrain from charging interest or interest.
The petitions challenged the RBI Circulars of March 27, 2020, and May 22, 2020. These allowed financial institutions to levy interest on loans during the six-month moratorium.
Arguments by the Petitioner
The petitioner sought direction from the Court to declare the part of RBI’s March 27, 2020 notification as ultra-vires. That is to the extent of charging interest on the loan during the moratorium. The petitioner said that this is an obstruction in right to life guaranteed by Article 21 of the Constitution.
Senior Advocate Rajiv Datta represented the petitioner. He said that he was ‘obliged’ to the court for understanding the troubles of petitioners. Further, he said, “No country shall charge compound interest. Yes, some sectors are doing better. Today cycles are selling heavily. That’s not the point. I only want the moratorium period interest on interest waiver. We are a humble citizenry. 90 percent of Indians have opted for deferment”.
He added, “Today the RBI wants to make money out of banks? In this serious situation? What about those who have taken huge sums of money from banks and have fled the country?”
Arguments by the Respondent
Solicitor General Tushar Mehta submitted from the respondents’ side before the Court. It is not easy for the banks to waive off interest since banks have to pay interest to its depositors. A plea of waiver of interest during the moratorium period will affect the financial stability of the bank and also put the interests of the depositors in jeopardy. He added, “Moratorium effectively means deferment.” Senior Advocate Harish Salve appears for Indian Banks Association. He submitted that banks are looking at financial liabilities that might arise after the pandemic ends, moratorium ends. He said that the issues need to be tackled in a sectorial way. The court will consider the various payments of deferrals on a case to case and sector to sector basis.
Salve said, “According to authoritative estimates, the world will see a meltdown by 2022, not charging interest during this period will put the entire banking sector under a lot of distress.”
Senior Advocate Mukul Rohtagi said, that there Is No Merit in “Charging Interest on Interest” for Deferred Payments During the Moratorium Period. He appeared for State Bank of India. He submitted that the banks’ obligations to the depositors are in force even during a pandemic.
Rohtagi said, “The benefit of deferment has to come with a cost and it cannot be availed and not come at a cost. 90% of borrowers have not even sought a moratorium because they know it is not free.”
Court’s Observation
The bench observed that it cannot treat times of pandemic as normal circumstances.
The bench orally observed, “Once the moratorium is fixed then it should serve the desired purposes and we see no merit in charging interest on interest.” The judges also opined that once the moratorium is fixed then the desired purpose should be served and the government should interfere in the matter as it cannot be completely left to banks.
Justice M R Shah remarked, “Once you allow moratorium, you have to see the same is availed. That’s why people are not availing it.”
Court’s Decision
The bench pointed out that the banks will classify accounts as Non-Performing Assets if borrowers do not give interest on interest. The bench added that it understood the concerns of the banks and are only talking about waiver of interest on interest.
Justice Kaul said, “We are aware of all these concerns and we are talking only about interest in interest. For these three months, you have deferred but then you have not done away with interest on interest.”
The Court also stated that the Central Govt. cannot raise its hand in helplessness and cannot say that it is between banks and customers. Additionally, it directed the Indian Banks Association to check if new guidelines can be brought in force. The Court has also asked the Centre and Reserve Bank of India to review the matter.
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