On 23 March 2021, the Supreme Court in the case of Small-Scale Industrial Manufactures Association (Regd.) v. Union of India and others has ruled inter alia that there shall be no charging of compound interest, interest on interest or penal interest with respect to instalments which had not been paid by borrowers after availing the loan moratorium scheme extended by the Reserve Bank of India (RBI) during 01 March 2020 to 31 August 2020 on account of the COVID-19 pandemic.
The judgment came in the context of the Notification dated 27 March 2020 issued by the Reserve Bank of India in which it had allowed banks and financial institutions to grant a moratorium of three months on payments of all instalments of term loans due between 01 March 2020 and 31 May 2020. Later on this period was further extended by another three months till 31 August 2020.
The Supreme Court in this judgment was considering a batch of petitions that had been filed by various petitioners who were seeking the following reliefs:
- Waiver of compound interest/interest on interest during the moratorium period;
- Waiver of total interest during the moratorium period;
- Sector-wise economic packages/reliefs;
- Moratorium to be provided for all accounts instead of being at the discretion of Lenders;
- Extension of moratorium period beyond 31 August 2020;
- Additional reliefs over and above the existing relief packages offered by the Central Government/RBI; and
- Extension of the last date for the invocation of the resolution mechanism ie. 31 December 2020 as per the Circular dated 06 August 2020
It is to be noted that the Supreme Court granted relief to the limited extent of not charging any compound interest or interest on interest or penal interest during the moratorium period while dismissing all the other reliefs sought by the petitioners.
The reasoning adopted by the Supreme Court was that it is not inclined towards interfering in matters of economic policy. Further, the apex Court in reliance to it’s stand on non-interference has relied on a catena of cases wherein it has consistently held that it shall not concern itself with the intricacies of trade and commerce. The Court has reiterated that it is of the firm opinion that judges do not have the expertise to delve in matters pertaining to economic policies and therefore, any public policy is not amenable to judicial inspection unless it is manifestly arbitrary, discriminatory or malafide.
The reasoning adopted behind certain rulings by the Supreme Court are further elaborated below:
1. Waiver of compound interest/interest on interest during the moratorium period
The Central Government had decided to not charge interest on interest on loans upto Rs. 2 crores only with respect to loan account in certain specific sector categories, on installments due during the moratorium period . The Supreme Court stated that there was no basis or rational behind restricting such relief to loans upto 2 crores and that too, only for specific sectors.
It was also observed that compound interest/interest on interest was chargeable on the deliberate or willful default of the borrower to pay the instalments and as such payment of such interest despite moratorium by the government was in the nature of a penal interest. Since the Government itself had deferred the payment of instalments due and payable during the moratorium period, non-payment of the same cannot be said to be willful on the part of the borrower.
Hence, it was held that there was no merit in charging interest on interest/compound interest/penal interest for the period during the moratorium on all loan accounts irrespective of amount and sector categories. The apex Court has also stated in its judgment that if such an interest has already been collected, it should either be refunded to the borrower or adjusted towards the next instalments.
2. Waiver of total interest during the moratorium period
The Court was of the opinion that the liability to pay interests on deposits by the bankers/lenders continued even during the moratorium period primarily because the banks had a responsibility towards a large number of small depositors and the likes who were entirely dependent on the interests from their deposits. Furthermore, the Court observed that many welfare schemes also thrived on the interest generated from their deposits and therefore, refused to interfere with the policy decision of the government as “granting such relief will have far reaching consequences for the economy.”
3. Moratorium to be provided for all accounts instead of being at the discretion of Lenders
The Court stated that bankers are commercial entities who are best placed to assess the requirements of its customers and therefore, it was justifiable for the Lenders to exercise their discretion when it came to deciding which accounts were eligible for the moratorium as any borrowing arrangement is ultimately a commercial contract between the lender and the borrower.
4. Extension of moratorium period beyond 31 August 2020 and/or Extension of the last date for the invocation of the resolution mechanism ie. 31 December 2020 as per the Circular dated 06 August 2020
The Court rejected both the reliefs on the ground that they fell within the realm of policy decisions and as such the Court was not inclined towards interfering with the same. Furthermore, the Court also observed that sufficient time (almost five months) was given to the eligible borrowers to invoke the resolution mechanism for COVID-19 related stressed assets after the Circular dated 06 August 2020 was notified. Therefore, the Supreme Court refused to extend the moratorium period or the last date for the invocation of the resolution mechanism.
The decision of the Supreme Court brings respite to the banks as they can now classify the loans that had not been paid beyond the moratorium period as non-performing assets (NPA) and proceed for recoveries. At the same time, the banks cannot be pleased from being disallowed to charge compound interest/interest on interest from all its borrowers. Furthermore, the Supreme Court’s refusal to delve into matters pertaining to public policy yet again is only going to make challenging economic policies of the Centre more difficult in the future.