Loan moratorium: SC sees 'no merit' in charging interest on unpaid interest

Next hearing in August, Bench instructs centre, RBI to firm up views

The Supreme Court has observed that there’s "no merit” in charging interest on unpaid interest for deferred loan payment instalments during the six-month Covid-19 moratorium period. The top court has, however, asked the Centre and the Reserve Bank of India (RBI) to firm up their views on the issue, while setting the next hearing for the first week of August.

The court also asked Indian Banks Association (IBA) to see if new guidelines can be brought in force for the moratorium. The hearing, on a petition filed against charging of interest on loans during the moratorium period, had representation from the Centre/Finance Ministry, RBI, State Bank of India, and the IBA.

“We realise that the Finance Ministry and the RBI need more time to revisit the issue of loan moratorium,” the three-judge bench, headed by Justice Ashok Bhushan, said.

Solicitor General Tushar Mehta, who represented the Centre, argued that banks have to pay interest to depositors and therefore waiving of interest is not easy. Banks have deposits of Rs 133 trillion and interest must be paid on that, he said, adding a waiver would have a cascading effect.

He pointed out that a complete waiver of interest during moratorium period might risk the financial stability of banks and this would put the interests of depositors in jeopardy. Mehta said the Centre may consider a waiver on a case-by-case basis.

“Once the moratorium is fixed, it should serve the desired purposes and we see no merit in charging interest on interest,” the bench, also comprising Justices S K Kaul and Justice M R Shah, orally observed. The government should consider interfering in the matter as it cannot leave everything to banks, the bench said.

The bench was hearing a plea challenging levy of interest on loans during the moratorium period. The plea, filed by Agra resident Gajendra Sharma, sought a direction to declare the portion of RBI's March 27 notification as something beyond the RBI’s legal power or authority, to the extent that it charges interest on the loan amount during the moratorium period, which creates hardship to the petitioner being borrower and creates hindrance and obstruction in 'right to life' guaranteed by Article 21 of the Constitution of India. The counsel representing banks association and SBI urged the bench that the matter should be deferred by three months. The counsel appearing for banks said that the plea seeking waiver of interest during moratorium period is premature and the banks would have to consider the issue on a case to case basis.

In the last hearing on June 12, SC had asked the Finance Ministry and the RBI to hold a meeting within three days to decide on waiver of interest on interest for deferred payments of instalments for loans during moratorium. The top court had observed that the question is not of waiver of complete interest for the entire moratorium period but limited only to interest charged on interest by banks.

Before that, on June 4, the bench had observed that the charging of interests by banks during the six-month moratorium period on term loans was ‘detrimental’. That came a day after the RBI submitted to the court that a waiver of interest on loans will impact the financial viability of the country’s financial sector and that the banks could forego about Rs 2 trillion in interest income if interests are waived for six months.