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Levying of interest on loans during the moratorium period: Supreme Court seeks reply from RBI

Dated: June 20, 2020

                                                                                                                                                          - By Megha Bhatia

Amidst the pandemic and the resulting lockdown, the Reserve Bank of India (RBI) released a circular on 27 March 2020, authorizing banks to extend a three-month moratorium on payment of instalments to borrowers. An extension of the moratorium period was announced on 22 May, making it a six-month moratorium.

Objective of moratorium

The RBI circular was issued to “mitigate the burden of debt servicing due to the disruption caused by the pandemic.” As per the RBI circular, banks will be allowed to continue charging interest for the moratorium period, but interest will be collected later.

A petition (PIL) was then filed in the Supreme Court stating that the object of the circular will be made meaningless if interest was later imposed and further it was argued that interest should not be charged at all during the moratorium period. The petitioner has submitted that at a time when the lockdown is in effect, the RBI's March 27 notification is acting “as ultra vires to the extent it charges interest on the loan amount during the moratorium period, which create hardship to the petitioner being borrow and creates hindrance and obstruction in ‘right to life’ guaranteed by Article 21 of the Constitution of India.”

Highlighting that he is an aggrieved party, the petitioner submits, in an immediate case, that the notification is contrary to the principles of natural justice. In this respect, he points out that, on one hand, all forms of livelihood activities are suspended for the time being and, on the other hand, interests are being charged during this moratorium period, which will ultimately lead to a tremendous rise in the monthly payment of EMI’s.

“The aforesaid notification qua payment of interest violates the principle of natural justice as the Government on one hand ceased the working of the individuals and on other hand asking to pay the loan interest during moratorium,” the petitioner says in his plea.

Earlier, on 30 April, the Supreme Court directed RBI to ensure that its policy of loan moratoriums requiring exemption from payment of EMIs and other loans during the COVID-19 lock-down period was followed by the banks in a right manner.

RBI’s stand on this situation

“While the Reserve Bank is taking all possible measures to provide relief to the real sector with regard to debt repayments on account of the fallout of Covid-19, it does not consider it prudent or appropriate to go for a forced waiver of interest, risking the financial viability of the banks it is mandated to regulate, and putting the interests of the depositors in jeopardy,” the Reserve Bank has said in its affidavit. 

The RBI rightly claimed that the waiver of interest during the moratorium on the repayment of the term loan would jeopardize the financial well-being and viability of the banks as well as the welfare of the debtors. The RBI has advised that the moratorium decision was aimed at ensuring the viability of sustainable companies and that the regulatory framework to delay the payment of the loan cannot be viewed as a waiver.

The RBI has also advised that the banks are required to operate on viable commercial criteria because they are the guardians of the depositors’ monies and behaviour of the banks must be driven by the interest of the depositors.

When banks take deposits, it becomes a ‘contractual obligation’ on them. After it, They cannot deny the payment of interest to depositors on their own. Even when banks provide moratorium on borrowers, it is the discretion of the banks and not the decision of the borrowers. Similarly, as depositors park their assets, depositors become borrowers to the bank and only depositors can determine whether to forego interest or if there will be a moratorium on the funds lent.

When a bank issues a receipt for a fixed deposit, it is equivalent to a ‘promise’ to repay with interest. It includes all the elements of a promissory note. Deviation from interest or principal payment shall not be permitted by law. If a bank fails to pay, it will have to face liquidation.

As per the current RBI guidelines, when a moratorium is issued, banks lose interest collection during this time which will impact their working capital. Although the banks may be financed by the central bank, they will have to pay interest on these loans, and there will be serious imbalances in the reliability of the assets and also the erosion of the bottom line. Expecting banks to give up their interest entirely instead of collecting it at a later date will be very unwise and unreal.

Supreme Court’s view

The Supreme Court noted that there was “no merit” in charging interest on unpaid interest on deferred loan payment instalments during the six-month period of the Covid-19 moratorium. However, the Supreme Court asked the Centre and the Reserve Bank of India to give their opinion on the matter while holding the next hearing for the first week of August.

The three-member bench of Supreme Court, comprising Justices Ashok Bhushan, SK Kaul, and MR Shah, said, “On one hand you are granting moratorium (on loans) but continuing with interest. It is more detrimental.

Justice Kaul suggested that the government should consider either carrying this responsibility of relieving interest on lenders or equipping banks to do so.
The court also asked the Indian Banks Association (IBA) for clarity as to whether new guidelines for the moratorium could be put into effect. The hearing was attended by officials from the Centre / Finance Ministry, RBI, State Bank of India and IBA.  

“We realise that the Finance Ministry and the RBI need more time to revisit the issue of loan moratorium,” the three-judge bench, headed by Justice Ashok Bhushan, said. “Once the moratorium is fixed, it should serve the desired purposes and we see no merit in charging interest on interest,” the bench said orally. The government should intervene in this matter as it cannot leave everything to banks, the bench further added.

    This debate is still ongoing even after the RBI said that in order to improve the difficulties faced by borrowers in repaying the accumulated interest for the moratorium period, on May 23 it had announced that with regard to working capital facilities, lending institutions may, at their discretion, convert the accumulated interest for the deferment period up to August 31, 2020, into a Funded Interest Term loan (FITL) which shall be repayable not later than March 31, 2021.