Supreme Court of India waives compound interest on ALL loans under moratorium due to COVID-19 pandemic

  • Banks in India cannot charge interest on accrued interest during the period borrowers have been allowed to suspend repayments.
  • The Reserve Bank of India (RBI) had allowed borrowers to defer payments following the economic crisis following the COVID-19 pandemic.
  • However, as repayments came to a halt, interest continued to be accrued by the banks and therefore the borrower would have had to bear the full burden in the end.
  • With this decision, the higher court also declared that any amount collected as interest on interestwill be refunded to the borrower.
  • Find out the latest news and updates on Business Insider.

The Supreme Court of India has ordered the waiver of interest on all loans under moratorium, not just those amounting to ₹2 crore.

“We are of the opinion that there will be no interest on interest or compensatory interest during the period of the moratorium, regardless of the amount of the loan. Any amount collected will be refunded, ”said Justice MR Shah according to
Bar and bench. He added that if a refund is not possible, the interest on the interest collected will be adjusted in the next installment due.

However, the court suggested that compound interest could be charged for willful and willful defaults.

The court also said there would be no extension of the standstill period or the loan restructuring offer.

Short Supreme denies requests for total interest relief and sectoral relief
Although the Supreme Court waived interest on all loans regardless of the amount, borrowers will still have to pay interest on the principal amount even during the moratorium period.

The bank explained that waiving full interest is not possible since banks have to pay interest to account holders and retirees.

He added that if sectoral relief is to be given, it will be given by the RBI. Further relief beyond the packages already offered will not be granted by the Supreme Court judgment.

The electricity sector, for example, wanted the court to “patch” the loopholes in RBI’s restructuring plan. Similar demands have been made by the real estate sector, educational institutions, mall owners and other industries that have borne the brunt of the COVID-19 pandemic.

The court explained that it had the necessary expertise to intervene in these cases. The economic packages and relief that needs to be provided are within the scope of the RBI and the government.

“The Court will not embark on an inquiry into whether public policy is wise or whether better policy can be made. Economic and fiscal policies are not subject to judicial review and the mere fact that a sector is not dissatisfied with a political decision cannot be the reason for interference unless there is dishonesty and arbitrariness in said political decision,” the Supreme Court order said.

The story so far
In March last year, the RBI announced that borrowers affected by the COVID-19 pandemic could defer interest payments on their loans until May 31, 2020.

The move was intended to provide relief to individuals and businesses that have been impacted by the COVID-19 pandemic without turning into a bad loan or non-performing asset (NPA).

As the pandemic continued and economic growth contracted further, the RBI extended the moratorium period until August 31, 2020.

However, as they say, there is no free lunch. Banks were willing to defer interest payments, but charged compound interest on the delay, adding to the burden on long-term borrowers.

After public outcry, the Indian government then issued a notice waiving interest on loans of up to ₹2 crore for eight categories of borrowers. But, this did not hit the right note with borrowers who were not covered by this network, leading the petitioners to file additional Supreme Court appeals.

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