Supreme Court waives compound, penal interests on loans during moratorium
The Supreme Court on Tuesday ordered banks against charging borrowers any penal interest or compound interest (interest on interest) on loans during the moratorium on repayment of loans from March to August 2020 in view of the Covid-19 pandemic. It rejected a request by individuals and traders’ associations for waiver of complete interest during the moratorium. The court refused to extend the moratorium or tinker with the resolution mechanism proposed by Reserve Bank of India (RBI) to waive compound interest on six categories of loans up to ₹ 2 crore.
A bench of Justices Ashok Bhushan, RS Reddy, and MR Shah issued the order on a clutch of petitions filed by corporate bodies, business associations, and individuals demanding extension of moratorium beyond August.
At the instance of the court, the Centre agreed to waive compound interest on loans for six categories. The business associations and corporate bodies had demanded the extension of this benefit to borrowers with loans of above ₹2 crore.
The bench said courts are not experts and such decisions lie in the realm of economic policy in which interference should be rarely made.
It added the Covid-19 pandemic affected even the government. The bench said the Centre and RBI still came out with schemes and packages to reduce stress on businesses and granting any further relief would have consequences on the economy.
The court clarified any penal interest or compound interest charged by banks for non-payment of any loan amount during moratorium shall be refundable. And if the bank is not in a position to refund, the same shall be adjusted in the loan amount, it added.
The bench said decisions on economic policy matters should be left to the government and courts should not interfere even if a second view is possible.
During the hearing of these cases, the Centre and RBI argued that compound interest on loans of up to ₹two crore was waived keeping in mind fiscal constraints and the viability of banks. Any order to further extend the benefit to other borrowers will make banks inviable, which an economy like India will be unable to sustain, the Centre and RBI argued.
Some petitioners questioned the ceiling limit of ₹2 crore for waiving compound interest.