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Banks cannot charge compound interest on loan from borrowers during the moratorium issued by RBI: SC
Full bench of the Hon’ble Supreme Court comprising of Justices Ashok Bhushan, R. Subhash Reddy and M.R. Shah, pronounced its verdict in the matter of Small Scale Industrial Manufactures Association (Regd.) v. Union of India and Others, REED 2021 SC 03006 wherein a batch of writ petitions under Section 32 of the Constitution were filed by different bodies, inter-alia, seeking: (i) waiver of compound interest/interest on interest on loans during the moratorium period i.e., 1 March 2020 till 31 August 2020, issued by the Reserve Bank of India (RBI) vide notification dated 27 March 2020; (ii) waiver of total interest during the moratorium period; (iii) extension of moratorium period; and (iv) sector-wise economic packages/reliefs by the Union of India and RBI. The Supreme Court observed that it is not in the authority to decide on policy decisions, such as economic and financial matters and hence, ruled against the reliefs sought by the Petitioners regarding waiver of total interest and extension of loan moratorium period offered by the RBI. However, in the interest of justice and to provide relief to the borrowers, the court restrained the banks from charging compound interest/interest-on-interest during the moratorium period.
In order to mitigate the burden of debt servicing brought about the disruptions in the market conditions on account of Covid19 pandemic, RBI came out with a circular dated 27 March 2020 bearing no. RBI/2019-20/186, which permitted lending institutions to (a) grant a moratorium on payment of all installments, including interest of term loans, falling due between 1 March 2020 and 31 August 2020 and (b) defer recovery of interest on working capital loans for the period from 1 March 2020 and 31 August 2020. This relief was followed by a condition that interest shall continue to accrue on the outstanding portion of the loans during the moratorium period. Aggrieved by the above condition of accrual of interest on outstanding loan payments during the moratorium period, various bodies, including MSME associations and real estate sector associations approached the Apex Court seeking for relief.
The Petitioners argued that the duty cast upon the National Disaster Management Authority (NDMA) under Section13 of the Disaster Management Act, 2005 (DMA 2005) to recommend relief in the matter of repayment of loans and/or grant of fresh loans on concessional terms to the distressed community of borrowers affected by the disaster has been completely abdicated. The reliefs provided by RBI cannot be a substitute for statutorily duties of NDMA under DMA Act. Further charging interest on interest/compound interest is in the nature of penal interest which can be charged only in case of willful default. In terms of RBI notification dated 27 March 2020 it cannot be said that there is any willful default which warrants interest on interest/penal interest/compound interest.
The Respondent at the outset informed the court about a slew of relief measures it has undertaken, including suspension of Sections 7, 9, and 10 of the Insolvency and Bankruptcy Code, 2016 and a circular dated 6 August 2020 by the RBI named Resolution Framework for Covid19related Stress, in order to provide succour to different industries reeling under the impact of Covid-19 pandemic. Further, relying on Pradip Kumar Maity v. Chinmoy Kumar Bhunia (2013) 11 SCC 122 and Union of India v. Kumho Petrochemicals Co. Ltd. (2017) 8 SCC 307, it was contended that Section 13 of DMA 2005 uses the word ‘may’ and hence, this section is to be read as an enabling discretionary provision and not mandatory. Moreover, the government has already come out with the ‘exgratia scheme’ under which it would bear the cost of the ‘interest on interest’ for MSME loans and personal loans up to Rs. 2 crores.
Placing reliance on a catena of judgments, such as R.K. Garg v. Union of India (1981) 4 SCC 675, State of M.P v. Nandala Jaiswal (1986) 4 SCC 566 and BALCO Employees’ Union (Regd.) v. Union of India (2002) 2 SCC 333, the Supreme Court stated that it has the limited scope of judicial review in economic policy matters and therefore, laid down the following principles:
(i) The Court will not debate academic matters or concern itself with intricacies of trade and commerce;
(ii) It is neither within the domain of the courts nor the scope of judicial review to embark upon an enquiry as to whether a particular public policy is wise or whether better public policy can be evolved. Nor are the courts inclined to strike down a policy at the behest of a petitioner merely because it has been urged that a different policy would have been fairer or wiser or more scientific or more logical. Wisdom and advisability of economic policy are ordinarily not amenable to judicial review;
(iii) Economic and fiscal regulatory measures are a field where judges should encroach upon very warily as Judges are not experts in these matters.
Hence, the court noted that how the financial reliefs/ packages are to be formulated, offered and implemented and duration of moratorium period is ultimately to be decided by the Government and the RBI on the aid and advice of the experts. The same is a matter for decision exclusively within the province of the Central Government and such matters do not attract the power of judicial review. In view of the aforesaid, the Supreme Court refused to grant relief sought by the Petitioners to issue any Writ of Mandamus directing the Union Government and RBI to declare/announce further relief packages and extend the moratorium period.
Insofar as question of waiver of interest during the moratorium period is concerned, the Supreme Court observed that the bankers/lenders have to pay the interest to the depositors and their liability to pay the interest on the deposits continue even during the moratorium period. Therefore, granting a relief of total waiver of interest during the moratorium period would have a far-reaching financial implication in the economy of the country as well as the lenders/banks.
The Court also found that on a conjoint reading of the relevant provisions of the DMA 2005, argument of Petitioners that the functions of all the Ministries are to be discharged by the NDMA which should take decision qua the area in each Ministry is legally untenable. It also agreed with the Respondents’ submission that the word ‘may’ used in Section 13 of the DMA, 2005 is to be read as an enabling discretionary provision which is not mandatory.
Lastly, the court emphasized that compound interest shall be chargeable on deliberate/willful default by the borrower to pay the installments due and payable which is in the nature of a penal interest. However, once the payment of installment is deferred as per the circular dated 27 March 2020 the non-payment of installment during the moratorium period cannot be said to be willful and, therefore, the court concluded that it is not justified to penalize the borrowers by charging compound interest accrued for the period during moratorium. Consequently, the court directed that any amount collected during the moratorium period by banks as interest on interest/ compound interest should be refunded and adjusted against the next EMIs payable by the borrowers.
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