The Reserve Bank of India, in view of the Covid pandemic, realised the financial emergency and liquidity crunch in our economy due to lockdown, announced moratorium for all loans for a certain period. However, there is dispute about the chargeability of interest  by the Banks/ Financial Corporations on this extended period.

The business entities, particularly the MSMEs demanded complete waiver of interest during the period of moratorium for the reason that due to ‘force- majeure’, the businesses were shut down for a very long period and still there seems no revival of the economy in the near future. It was also pleaded that the  banks should also bear some burden of the pandemic. As regards the grant of moratorium by the banks, it is argued that the same is in interest of banks as NPAs & unnecessary litigations have been avoided by this gesture. Moreover, the banks are not incurring any loss due to moratorium.  The only effect of the moratorium is that the EMIs of the loans have just been postponed.

The matter pertaining to interest on the deferred loans is now before the Apex Court. The precise question before the Court is not the waiver of complete interest for entire moratorium period but it is limited only to interest charged on interest on the deferred loans.

The Supreme Court on Friday 12th June 2020 has asked Finance Ministry and RBI to hold a meeting within three days & decide on waiver of interest on deferred payments of instalments for loans during the moratorium period announced in wake of the covid-19 induced lockdown. “If interest payment has been deferred for three months, banks should not add that amount to the payable money and charge interest on interest,” Supreme Court 3 member bench comprising of Justice Ashok Bhushan, Sanjay Kishan Kaul and M R Shah had remarked.

The bench clarified that the question is not of waiver of the complete interest for the entire moratorium period but it is limited only to interest charged on interest by the banks.

“We are doing balancing. The only thing we are wanting is a wider measure. Our concern in these proceedings is only whether the interest that has been deferred for 3 months will be added to charges payable later and whether there will be interest on the interest,” the bench added.

The bench said that if the RBI reply “goes much beyond the query posed by us there will be a lot of opinions on it”. “Our query is very limited on whether there can be waiver of interest on interest,” it said.

The bench was hearing a plea filed by petitioner Gajendra Sharma, in which he has sought a direction to declare  RBI’s March 27 notification “as ultra vires to the extent it charges interest on the loan amount during the moratorium period, which create hardship to the petitioner being borrower and creates hindrance and obstruction in ”right to life” guaranteed under Article 21 of the Constitution of India”.

The apex court had said there are two aspects under consideration in this matter – no interest payment on loans during the moratorium period and no interest to be charged on interest. It had said that these are challenging times and it is a serious issue as on the one hand moratorium is granted and on other hand interest is charged on loans. On May 26, the top court had asked the Centre and the RBI to respond to the plea challenging levy of interest on loans during the moratorium period.

The RBI in its reply told the top court that it is taking all possible measures to provide relief with regard to debt repayments on account of COVID-19 but it does not consider it prudent to go for a “forced waiver of interest, risking the financial viability of the banks it is mandated to regulate, and putting the interests of the depositors in jeopardy”.

Both the government and the RBI should show a large heart and concede before the Apex court and not charge any interest on the interest payable during the period of delay/moratorium. The financial position of the Banks are very strong and  if they do not charge interest on interest, they will not lose anything just gain a little less. This generosity will boost their brand value for which they spend crores for building the same. It is expected that the issue would be amicably decided by the Apex Court with the consent of RBI & Goverment  on the next date of hearing fixed for Wednesday, 17th June, 2020.

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