KRISHNADAS RAJAGOPALNew Delhi, March 23

The Supreme Court on Tuesday dir-ected banks and fi��nancial institu-tions to refund the compound in-terest (interest on interest or penalinterest) collected on EMIs duringthe loan moratorium period, fromMarch 1 to August 31, 2020.

“It is directed that there shall notbe any charge of interest on in-terest/compound interest/penal in-terest for the period during themoratorium,” a Bench of JusticesAshok Bhushan, R. Subhash Reddyand MR Shah ordered in a 148-pagejudgment. The court said theamount accumulated as com-pound/penal interest or interest oninterest during the six-monthmoratorium on term loan EMIsshould be given as “credit/adjustedin the next instalment of the loanaccount”.

Justice Shah, who authored thejudgment, reasoned that the addi-tional interest in the form of com-pounding or penalty is usually col-lected from defaulters. When thepayment of instalments had beendeferred during the moratorium,what was the need to burden bor-rowers, already reeling under thefi��nancial loss of a pandemic andlockdown, the court asked.

Relief for lendersThe judgment also spelt relief forbanks and lenders with the court

lifting its near-six-month bar onclassifying accounts of defaultingborrowers as non-performing as-sets. In October, the apex court hadstopped banks and lenders from de-claring accounts of borrowers asNPAs.

‘Irrational’ schemeThe judgment termed as irrationalthe government’s plan to restrictthe waiver of interest on interest toloans of up to ₹��2crore. This scheme,introduced in October, was limitedto debts in MSME, education, hous-ing, consumer durables, creditcard, auto, personal and consump-tion categories within the ₹��2crorelimit.

“There is no justifi��cation shownto restrict the relief of not charginginterest on interest with respect tothe loans up to ₹��2 crore only, andthat too, restricted to the aforesaid(eight) categories. There is no ra-tionale to restrict such relief,”Justice Shah noted. But the court re-fused to entertain complaints frompetitioners that the governmentdid not do enough to ease the fi��nan-cial strain during the pandemic.

“By and large, everybody hassuff��ered due to the lockdown dueto Covid19 pandemic. Even the Gov-ernment suff��ered due to non-recov-ery of GST... Merely, since the reliefsannounced by the Union of India/RBI may not suit the desires of theborrowers, the reliefs/policy de-

cisions related to Covid-19 cannotbe said to be arbitrary or violative ofArticle 14 of the Constitution,” thecourt said.

No total waiverThe apex court also refused the in-sistent pleas of the borrowers for atotal waiver of interest for EMIs fall-ing within the moratorium period.It declined to extend the morator-ium till December 2020 or, as someof the petitioners sought, for an-other six months from August 31,2020. The court said a total waiverof interest would hit banks and de-positors hard.

“To grant such a relief of totalwaiver of interest during themoratorium period would have afar-reaching fi��nancial implicationin the economy. Banks and lendershave to pay the interest to the de-positors. Their liability to pay the in-terest on the deposits continuedeven during the moratoriumperiod… Continuing to pay interestto depositors is not only one of themost essential banking activitiesbut it shall be a huge responsibilityowed by the banks to crores andcrores of small depositors, pension-ers, etc, who survive on the interest

from their deposits,” Justice Shahreasoned. Besides, the court saidnumerous welfare funds schemessurvive on the interest generatedfrom bank deposits.

The court further declined pleasto extend the deadline, fromDecember 31, 2020, for the invoca-tion of RBI’s resolution mechanismfor “big borrowers” like businessesand manufacturing sectors. Themechanism titled ‘ResolutionFramework for Covid-19-relatedStress’ issued in an August 6 circularhad informed that lending institu-tions, guided by their respectiveboard-approved policy, would pre-pare viable resolution plans for eli-gible borrowers under stress on ac-count of Covid-19.

Ruling welcomed The decision has gone down wellamong experts and the legal fra-ternity. Jay Parikh, Partner, L&L Part-ners, said that the refusal to extendmoratorium and the vacation ofthe stay on the classifi��cation ofNPAs by banks is a shot-in-the-armfor the banking sector.

Sanjay Tibrewala, CEO, PhoenixARC said: “Complete waiver of in-terest during the moratoriumwould have badly hurt the balancesheet of lenders... The lenders cannow recognise their NPAs and starttaking appropriate corrective ac-tion for recoveries.”

Anshuman Panwar, Co-Founder,Creditas Solutions, a digital-baseddebt collection platform, said, “Itensures the payment culture of re-tail borrowers remains intact.”

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LOAN MORATORIUM CASE

No levy of compound/penalinterest on any borrower: SCSupreme Court orders banks/FIs to refundinterest collected during moratorium; allowslenders to resume NPA tagging of bad loans