Loan moratorium: SC sees no merit in levying interest on interest

The Supreme Court, while hearing the PIL seeking interest waiver for the 6-month moratorium period, remarked that it sees no merit in banks charging interest on the accumulated interest payable. The SC also observed that an issue of this nature can’t be left by the government to the banks, and that the Centre should consider intervening in the issue.

However, the SC stopped short of issuing any interim directions, deferring the hearing for over 45 days till the first week of August.

On March 27, the RBI issued circular allowing financial institutions to allow customers a moratorium on loan instalments that fall between March 1 and May 31. On May 22, the RBI extended the moratorium for another 3 months, till Aug 31. The RBI circulars, however, provide for the accumulated interest for the period to be paid at the end of the 6-month moratorium period.

The SC is hearing a batch of petitions that have sought for a waiver of the accumulated interest for the 6-month period. The pleas before the SC have cited loss of livelihood and economic pain, for seeking the interest waiver. The RBI had cautioned against any such forced interest waiver claiming a potential hit of Rs 2 lakh crore to banks.

However, the SC has clarified that the scope of the issue before the SC was limited to levy of interest on accumulated, deferred interest.

Opening today’s proceedings, the Solicitor General Tushar Mehta, appearing for the govt, cautioned that it wasn’t advisable to waive interest for 6 months. He argued that banks have to pay interest of savings of depositors, and that depositors will get hurt if the waiver is allowed. On the issue of levy of interest on interest by banks, the govt submitted that such issues would fall between the bank and the borrowers.

The SC, however, observed that the govt can’t claim helplessness by relegating the issue to be decided between the banks and the borrowers. The SC observed that if the moratorium was announced to allow relief to people, then the govt should ensure that the benefits are made available to the people.

The SC also observed that the reason why majority of borrowers have not opted for the moratorium, is that they don’t see any benefits. This observation came after senior advocate Mukul Rohatgi, appearing for SBI, asserted that 90% of the borrowers haven’t even opted for the moratorium. He had argued that interest waiver cannot be issued like a free gift.

Meanwhile, Harish Salve, appearing for the Indian Banks’ Association, also argued against any forced interest waiver. He argued that the plea was premature, and that the situation was evolving. The banks also pushed for the case to be deferred by 3 months, to help the banks assess the total burden of the moratorium.

The top court has now deferred the case to the first week of August. The SC has urged the finance ministry and RBI to revisit the issue of the moratorium. The SC has also sought for clarity from the finance ministry on the govt’s position on banks levying interest on interest. Founding Partner at the law firm Induslaw, Gaurav Dani, said, “A complete interest waiver will lead to depositors getting affected and will also lead to overall stress on the banking system. A balanced approach is required to protect the interests of the depositors and the same time to ensure that there is a relief given to borrowers on the mounting interest burden.”