Balancing Act

In a verdict that balances business and consumer interests, the Court ruled that there would be a waiver of compound interest on loans from March 1 to August 31, 2020 due to Covid-19

- Shivanand Pandit

IN a huge relief, the apex court has ordered waiver of compound interest (interest-on-interest) for all borrowers that availed a loan moratorium in 2020 under the RBI’s pandemic related aid measures. The verdict was greeted by many experts in the banking industry who said it gave a clear picture on interest waiver and bad loan categorisation.

A bench of Justices Ashok Bhushan, R S Reddy and M R Shah said: Once the payment of instalment is deferred as per March 27, 2020 circular, non-payment of the instalment during the moratorium period cannot be said to be wilful and therefore there is no justification to charge interest on interest/compound interest/penal interest for the period during the moratorium.

With the intention of lessening the stress on borrowers during the Covid-19 crisis last year, the RBI permitted banks and all other financial institutions to extend a moratorium or pause on term loans and advances. The moratorium was only a deferment of EMIs, and not a waiver. However, there were requests that banks should also waive off the interest amount during those six months. Considering the huge cost involved, banks rejected a complete waiver. There were also appeals requesting postponement of the moratorium period beyond six months. The Supreme Court decreed against giving a total interest waiver to borrowers. Nonetheless, it pronounced that charging compound interest amounts to penal interest and all borrowers should be compensated for this interest levied during the moratorium phase. The Court also mentioned that no additional postponement would be given on the moratorium and indicated that banks can start labelling non-performing assets (NPAs).