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"Crores have been defaulted on NPA accounts but you have to charge interest", SC asks Centre and RBI to review interest on loan moratorium

Shruti Mahajan

The Supreme Court today asked the Central government and the Reserve Bank of India (RBI) to review the move to charge interest during the moratorium period on loan repayment introduced in light of the COVID-19 pandemic.

The Indian Banks Association (IBA) was asked to look into the possibility of evolving new guidelines to address the issue.

The Court will hear the matter next in the first week of August. (Gajendra Sharma vs Union of India)

The Bench of Justices Ashok Bhushan, Sanjay Kishan Kaul, and MR Shah today pulled up the Centre, stating that if a benefit of moratorium is announced, the same should reach the beneficiaries.

The Centre had earlier sought time to reply, with Solicitor General for India Tushar Mehta telling the Court that a meeting needed to be convened with officials of the RBI and the Finance Ministry.

Mehta today told the Court that the difficulty in interest waiver arises from the fact that people who have taken loans include those who have taken small-time loans, as well as those who have borrowed amounts ranging in hundreds of crores.

When the Court pointed out that a distinction to this effect cannot be made, Mehta submitted that even banks have a duty of paying compounded interests to their depositors. Mehta said that moratorium only meant deferment of repayment. However, the Court questioned the need to charge interest during these difficult times.

"We understand that since you give interest to depositors you will charge the same... You are saying that payment of Rs. 1 lakh is deferred, but you cannot charge interest on this 1 lakh after 3 months?"
Justice Ashok Bhushan
"You are giving them a favour by deferring the payment. It is an irony that thousands of crores have been defaulted on NPA accounts but you have to charge interest here. We are aware of the problems if interest is not charged, but a pandemic is not a normal situation."
Justice Sanjay Kishan Kaul

While Mehta sought to clarify that for deferment of repayment of loan, there will be no penal charge, the Court said that the main concern before it was concerning "burden of interest on interest."

Supplementing Mehta's submissions, Senior Advocate Harish Salve, representing the (IBA), said that deferment is merely pushing of payment of installments. The banks are still obligated to pay compounded interests to their depositors for which an arrangement would have to be made during this moratorium period, Salve added.

Addressing the Court on the concern regarding burden of interest, Mehta sought to elucidate on the schemes for borrowers and said, "we have separate scheme for borrowers in agricultural sector, micro food processing units, farming sector etc."

Salve termed this plea for interest waiver "premature" in nature, and said that "we are still in a tunnel". The Senior Counsel argued that if all sectors are in distress, then the government may have to provide funding. He went on to underscore that while some companies are not doing well, there are others that are doing very good business, citing the example of streaming platform Netflix.

"Most companies are doing badly", Justice Bhushan said.

Senior Advocate Mukul Rohatgi, representing State Bank of India, told the Court that about 90 per cent of the borrowers have not sought to avail the moratorium, given that they know it is "not free". The Court, however, yet again specified that the concern was not pertaining to completely waiving off the interest.

"We are not speaking about completely waiving off interest... Suppose you don't charge interest on interest for three months, can you take this burden?"
Justice Bhushan

Detailing the technicalities, Rohatgi submitted that the term "interest on interest" may not be accurate given that the one part of the interest is converted to capital interest after due course and this is a facility that cannot be availed for free.

The Court, however, observed that if a moratorium facility is provided for, then the authorities must also see to it that the benefit is availed by the people.

"RBI's worry and Centre's concern is about the 133 crore of deposits. If no interest is charged, then it would have a cascading effect."
Solicitor General Tushar Mehta

The Court then asked if "Centre can help the banks for the interest being charged for the period of loan deferment or can the banks absorb this."

Salve replied that once the nation "comes out of this tunnel" after three months, the situation as regards moratorium will be clearer. At that stage, the question regarding payment of interest can be addressed, Salve said.

Senior Counsel KV Viswanathan told the Court that under the National Disaster Management Act (NDMA), there needs to be relief as regards recovery of loans. He pointed out that presently, there is no loan restructuring mechanism in place.

Senior Counsel Rajiv Dutta, for the petitioner, pointed out that while there were individuals who took "humongous loans" and ran off, an interest during moratorium is being sought to be levied on others.

After hearing the arguments, the Court fixed the next date for hearing in the case for the first week of August.

In view of the COVID-19 pandemic, the RBI had issued a circular on March 27 allowing banks to grant a moratorium to borrowers on payment of installments for a period of three months, which was later extended to six months. The RBI also made it clear that interest accruing on these loans for this period would be payable.

The part of the circular regarding charging of interest was challenged by some petitioners, who claimed that their monthly EMI payment will stand increased as a result.

On the issue of the interest component, the RBI made its position clear and placed an affidavit before the Court stating that it would not be appropriate to go for forced waiver of interest keeping in view the financial health of banks as well as the interest of the depositors.

During the previous hearing, the Supreme Court had observed that the RBI, in its reply, had gone beyond what was asked of it going further to point out that a complete waiver of interest was not suggested.

In a separate petition related to the circular, an association of real estate developers, CREDAI, had also moved the Supreme Court seeking a clarification on whether the circular also brought under its scope Non Banking Finance Comoanies (NBFCs) and Housing Finance Companies (HFCs).

Filing a response on this plea, the Securities Exchange Board of India (SEBI) had questioned the locus of the association to bat for relief for the NBFCs and HFCs, terming the petition a "proxy litigation".

Read Order:

Gajendra Sharma vs UOI - 17.06.2020.pdf
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