Supreme Court’s ruling on loan moratorium: brief overview
Amid the unprecedented disruptions caused on account of Coronavirus Pandemic, Reserve Bank of India (RBI) with the objective of moderating the stressed financial conditions had on 27.03.2020 vide its circular DOR. No. BP.BC.47/21.04.048/201920, allowed a moratorium as temporary relief, on payment of instalments of term loans due between 01.03.2020 and 31.05.2020, later extending the period till 31.08.2020 vide its circular DOR. No. DOR.No.BP.BC.71/21.04.048/2019-20 dated 23.05.2020 (hereinafter collectively referred to as the “Regulatory Packages”).
In relation to the said Regulatory Packages, the interpretation of certain aspects as well as the subsequent steps taken by the Regulator & the Central Government came up for consideration before the Hon’ble Supreme Court in the matter of “Small Scale Industrial
Manufactures Association (Regd.) v. Union of India & Ors., bearing Writ Petition (Civil)
No. 476/2020” (“Small Scale supra”), seeking reliefs namely, (i) total waiver of interest during the moratorium period; (ii) to extend the period for invocation of the resolution mechanism, namely 31.12.2020 provided under the 06.08.2020 circular; (iii) that there shall be sector-wise Reliefs provided by the RBI; and (iv)that the Central Government/RBI must provide for some further reliefs over and above the relief packages already offered were also dismissed altogether.
The Hon’ble Supreme Court disposed off the Writ Petition vide judgment dated 23.03.2021.
The key highlights of the judgment are as under:
1. The Hon’ble Supreme Court vide an interim order dated 03.09.2020 passed in Writ Petition (Civil) No. 825/2020 titled as “Gajendra Sharma v. Union of India & Ors.” and Small Scale supra (“Interim Order”) granted interim relief to the Petitioners in question/borrowers by directing that the loan accounts which were not declared NPA till 31.08.2020 shall not be declared NPA till further orders. The said Interim Order now stands vacated.
2. The Hon’ble Supreme Court has observed that the scope of judicial review is limited to the extent the same concerns the policy decisions affecting the economy. It has further been observed that if the moratorium period is extended beyond 31.08.2020, the same would seriously affect the banking sectors and would have far reaching implications on the economy of the country. Therefore, the Petitioners in question/borrowers shall not be entitled to reliefs regarding extension of moratorium period beyond 31.08.2020.
3. The Hon’ble Supreme Court has observed that charging compound interest/interest on interest is chargeable on deliberate/wilful default committed by the borrowers on payment of instalment and is penal in nature. Further the non-payment of interest during the moratorium period cannot be said to be deliberate/wilful and therefore the Lending Institutions shall not charge interest on interest/compound interest /penal interest for the period during the moratorium and any amount already recovered under the same head, namely interest on interest/compound interest /penal interest shall be refunded to the concerned borrowers and to be adjusted/ given credit in the next installment of the loan account.
In view of the aforesaid judgment passed by the Hon’ble Supreme Court it is evident that the Lending Institutions may proceed to classify the loan accounts as NPA post expiry of moratorium period i.e. 31.08.2020 since the said Interim Order restraining Lending Institutions to classify the loan account as NPA post 31.08.2020 has been vacated and no further extension of moratorium period has been granted by the Hon’ble Supreme Court beyond 31.08.2020. While classifying the loan accounts as NPA from 01.09.2020 onwards, the Lending Institutions shall exclude the moratorium period w.e.f. 01.03.2020 to 31.08.2020 while calculating the number of day’s past-due for such accounts. Further, the number of day’s past-due for loan accounts shall be calculated by the Lending Institutions after adjustment of interest on interest/compound interest that has been charged by the Lending Institutions during the moratorium period i.e. 01.03.2020 to 31.08.2020.
The Hon’ble Court while passing the aforesaid judgment took a balanced view by taking into account the interest of the depositors, borrowers, and banks. Financial stability and economic growth of the country were also kept in mind as it is estimated that in the Indian Banking system for every ‘loan account’ there are about 8.5 ‘deposit account’. The banks can pay interest to depositors only because borrowers pay interest to the bank. This transaction of depositors/banks/borrowers is inevitably a part of a chain that can never be permitted to be broken. A complete waiver of interest obligations as sought by the petitioner(s) would have impaired the financial structure of the banks and unleashed a greater economic danger than what has been caused by the pandemic. The judgment pronounced by the Apex Court has offered much-needed clarity to the financial industry on interest waiver and bad loan classification as well as would go a long way around in managing the expectations of borrowers in this unprecedented environment.