SC: Moratorium means banks can charge interest but not 'interest on interest'

New Delhi: The Supreme Court Wednesday said there is "no merit in charging interest on interest" for deferred loan payment instalments during the moratorium period announced in wake of the COVID-19 pandemic.

A bench headed by Justice Ashok Bhushan observed that once moratorium is fixed then it should serve the desired purposes and the government should consider interfering in the matter as it cannot leave everything to banks.

"Once the moratorium is fixed then it should serve the desired purposes and we see no merit in charging interest on interest," the bench, also comprising Justices S K Kaul and Justice M R Shah, orally observed.

The bench was hearing a plea filed by an Agra resident Gajendra Sharma, who has sought a direction to declare the portion of the RBI's March 27 notification "as ultra vires to the extent it charges interest on the loan amount during the moratorium period, which create hardship to the petitioner being borrower and creates hindrance and obstruction in 'right to life' guaranteed by Article 21 of the Constitution of India".

Solicitor General Tushar Mehta, appearing for the Centre and the Reserve Bank of India, told the apex court that waiving the interest completely will not be easy for banks as they have to pay interest to their depositors.

"There are 133 lakh crore rupees in deposits with banks and interest has to be paid on them and the waiver will have a cascading effect," Mehta told the bench.

The bench, which posted the matter for hearing in first week of August for allowing the Centre and the RBI to review the situation, asked the Indian Banks Association to examine whether they can bring new guidelines in the meantime on the issue of loan moratorium.

Mehta argued that complete waiver of interest during moratorium period might risk the financial stability of banks and this would put the interests of depositors in jeopardy.

The counsel representing banks association and State Bank of India (SBI) urged the bench that the matter should be deferred by three months.

The counsel appearing for banks said that plea seeking waiver of interest during moratorium period is premature and the banks would have to consider the issue on a case to case basis.

On June 12, the top court had asked the Finance Ministry and the RBI to hold a meeting within three days to decide on waiver of interest on interest for deferred payments of instalments for loans during moratorium period.

The top court had observed that the question is not of waiver of complete interest for entire moratorium period but it is limited only to interest charged on interest by banks.

The petitioner has sought a direction to the government and the RBI to provide relief in repayment of loan by not charging interest during moratorium period.

On May 26, the top court had asked the Centre and the RBI to respond to the plea challenging levy of interest on loans during the moratorium period.

The RBI in its reply has told the court that it is taking all possible measures to provide relief with regard to debt repayments on account of the fallout of COVID-19 but it does not consider it prudent 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.