Banks told to credit 'interest on interest' to borrowers, RBI tells SC

Banks, financial and non-banking financial institutions have been asked to take "necessary actions" to credit into the accounts of eligible borrowers by November 5, RBI has told the Supreme Court.

Banks, financial and non-banking financial institutions have been asked to take "necessary actions" to credit into the accounts of eligible borrowers by November 5 the difference between compound and simple interest collected on loans of up to Rs 2 crore during the moratorium scheme, RBI has told the Supreme Court.

The Reserve Bank of India (RBI), in an affidavit filed through Assistant General Manager Prasanta Kumar Das, referred to the October 23 additional response of the Ministry of Finance and said the federal bank has also acted in pursuance of that by issuing a notification to banks and FIs recently on refund of extra money to the borrowers.

The central government had earlier told the apex court that the lenders have been asked to credit into the accounts of eligible borrowers the difference between compound and simple interest collected on loans of up to Rs 2 crore during the RBI's loan moratorium scheme by November 5.

"All Primary (Urban) Cooperative Banks/State Cooperative Banks/District Central Cooperative Banks, All All India Financial Institutions and All Non-Banking Financial Companies (including Housing Finance Companies) to be guided by the provisions of the scheme and take necessary actions within the stipulated timeline therein," the RBI said in its recent affidavit.

The top court is scheduled to hear a batch of PILs including the one filed by Gajendra Sharma on October 3 relating to charging of interest on interest by banks on EMIs which have not been paid by borrowers after availing the loan moratorium scheme of RBI during March 1 to August 31.

"I say... Ministry of Finance, Department of Financial Services in view of the unprecedented and extreme COVID-19 situation vide its letter ... has approved a 'scheme for grant of ex-gratia payment of difference between compound interest and simple interest for six months to borrowers in specified loan accounts (01.03.2020 to 31.08.2020)' along with operational guidelines and mechanism for such grant," the RBI official said.

The affidavit, which also contained the decision of the government and the subsequent RBI's circular as annexures, said that all banks, FIs, and housing finance firms have been asked to pass on the benefits of the Centre's decision to eligible borrowers.

Earlier, the Centre has said that the eligible borrowers will be benefitted by November 5 by the lenders after the apex court had come down heavily on it, saying that nothing has been done on ground to pass on the benefits.

The Ministry of Finance has said that after crediting this amount, the lending institutions would claim reimbursement from the central government.

The government had said that the ministry has issued a scheme as per which lending institutions would credit this amount in the accounts of borrowers for the 6-month loan moratorium period which was announced following the COVID-19 pandemic situation.

On October 14, the apex court had observed that the Centre should implement "as soon as possible" the interest waiver on loans of up to Rs 2 crore under the RBI's moratorium scheme and had said that the common man's Diwali is in the government's hands.

The Centre had earlier told the court that going any further than the fiscal policy decisions already taken, such as waiver of compound interest charged on loans of up to Rs 2 crore for moratorium period, may be "detrimental" to the overall economic scenario, the national economy and banks may not take "inevitable financial constraints".

The RBI had also filed an affidavit in the apex court saying that loan moratorium exceeding six months might result in "vitiating the overall credit discipline", which will have a "debilitating impact" on the process of credit creation in the economy.

These affidavits were filed following the top court's October 5 order asking them to place on record the K V Kamath committee recommendations on debt restructuring because of the COVID-19 related stress on various sectors as well as the notifications and circulars issued so far on loan moratorium.

It has also said that the apex court's interim order of September 4, restraining classification of accounts into non-performing accounts in terms of the directions issued by the RBI, may kindly be vacated with immediate effect.

The Kamath panel had made recommendations for 26 sectors that could be factored by lending institutions while finalising loan resolution plans and had said that banks could adopt a graded approach based on the severity of the coronavirus pandemic on a sector.

Initially, the RBI on March 27 had issued the circular which allowed lending institutions to grant a moratorium on payment of instalments of term loans falling due between March 1, 2020, and May 31,2020, due to the pandemic.

Later, the period of the moratorium was extended till August 31 this year.