Interest waiver: SC protects borrowers from coercive action by banks

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September 4, 2020 5:30 AM

“The question is about the demands of compound interest in the meantime. Moratorium and penal interest cannot go together. RBI will have to clarify,” Justice R Subhash Reddy, who was also part of the Bench with Justice MR Shah, said.

Instead of opting for interest waiver, the government has gone for the measures for revival of the sectors in tandem with RBIInstead of opting for interest waiver, the government has gone for the measures for revival of the sectors in tandem with RBI

The Supreme Court on Thursday secured an undertaking from the government that the loan accounts not declared as non-performing asset (NPA) as on August 31, the day a six-month moratorium period ended, won’t be treated as NPAs till its further orders.

Affirming its commitment to protect the borrowers, whose repayment capacity has been affected by Covid-19 and the lockdown, the court, in an interim order, also asked banks not to take any coercive action against borrowers.

The government and banks apprised the court of the sector-specific relief packages being rolled out in order to protect the interests of borrowers.

However, even during Thursday’s hearing – the latest in a long series – the court and the government-RBI-banks combine seemed finding no meeting ground — the court finds a dichotomy between the moratorium and ‘penal’ (compound) interest, while the government through its top attorneys stressed that waiver of interest or interest on interest is in conflict with the basic canons of finance.

The government continued to draw the court’s attention to the facility of one-time restructuring of loans being made available to borrowers of assorted nature and loans of various kinds, and flagged it as a viable way of addressing the plight of borrowers, who are not defaulters by nature, without compromising on financial stability.

The matter will be further taken up for hearing on September 10.

An apex court bench headed by Justice Ashok Bhushan said everything regarding the issue of loan moratoriums cannot be left to banks. Certain steps will have to be taken by the Reserve Bank of India or the government in this regard, it asserted.

Earlier, in an affidavit, the government had stated that a borrower, who is fearful of being in default as on September 1 and becoming an NPA soon thereafter (due to the expiry of the six month moratorium period on Aug 31), could continue to avail moratorium as a part of the resolution plan implemented in terms of the (August 6, RBI) circular. The two-year RBI window would pave the way for a more durable, long-term solution of debt restructuring, it argued, adding that it offered customised reliefs to individual borrowers, including “alteration in the rate of interest and haircut (by lenders) on amount payable as interest”.

“The question is about the demands of compound interest in the meantime. Moratorium and penal interest cannot go together. RBI will have to clarify,” Justice R Subhash Reddy, who was also part of the Bench with Justice MR Shah, said.

Solicitor General Tushar Mehta argued that “the idea of the moratorium was to defer repayment to ease the burden caused by Covid-19 and lockdown so that business can manage working capital. The idea was not to waive off interest. The effort is that those who are affected by Covid-19 and facing distress get the benefit and those who are defaulters are not able to take benefit. Instead of opting for interest waiver, the government has gone for the measures for revival of the sectors in tandem with RBI”.

“The expert committee will come up with sector specific guidelines on September 6. The panel will decide on the sector-wise relief to ease stress caused by the pandemic,” he said, adding that the National Disaster Management Authority is not required to step in at this moment.

“Normally an account becomes an NPA if payment is not made for 90 days. And if someone was granted loan moratorium by the bank, his account will not become an NPA unless he misses three more installments after August 31. So, the moratorium period was to be excluded, first three months and then another three months after it was extended. Accounts do not become NPAs on September 1 even after the moratorium period ended on August 31,” the SG said.

Senior Counsel Harish Salve, appearing for the Indian Banks Association, argued that the banks may come up with the resolution plans for some sectors like the power. “Common man’s problems are different from those of the corporates. If kind of borrowers and the type of borrowing is identified then specified relief can be provided. Individual and industrial problems need to be addressed differently,” he argued.

The apex court was hearing a batch of petitions seeking waiver of interest and waiver of interest on interest on the suspended EMIs during the moratorium period. The matter will be further taken up for hearing on September 10.

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