The Supreme Court of India today ruled in favour of waiving compound interest, ie, interest on interest in the course of the six-month moratorium announced by the Reserve Bank of India final year. The apex court stated that banks will not charge compound interest or penal interest on any quantity in the course of the moratorium period for all borrowers, PTI reported. Along with this, the court has also rejected pleas by several trade associations to extend the loan moratorium that ended in August final year. Banking stocks on Dalal Street surged greater following the Supreme Court’s ruling and Bank Nifty jumped 1.4%.
The Supreme Court additional directed banks to credit or adjust the quantity currently charged by them from borrowers. The court added that it can’t do a judicial critique of the Centre’s monetary policy choice unless it is malafide, arbitrary. The judgment was delivered by a Bench of Justices comprising Justice Ashok Bhushan, R Subhash Reddy and MR Shah. The bench had reserved the judgement on December 17.
Rejecting pleas for a full waiver on interest the court opined that such a move would have consequences on the economy. The bench also stated that interest waiver would impact depositors. Along with this, the court also rejected pleas for additional relief in the matter.
“The Supreme Court judgment is very welcome,” stated Mahesh Misra, CEO, IMGC (India Mortgage Guarantee Corporation). “Any other outcome would have created a potential moral hazard and also penalized conscientious borrowers. This creates the right precedent as well,” he added.
The choice to not waive off interest totally is also becoming observed as a positive. “The apex court has also taken a very prudent view by not granting a complete waiver of interest which would have severely impacted the banking system,” stated Siddharth Srivastava, Partner, Khaitan & Co. He added that interest on interest would have diluted the relief granted by the RBI.
Earlier the central government had told the apex court that waiving interest on all the loans and advances to all categories of borrowers for the moratorium period in the course of the pandemic would outcome in Rs 6 lakh crore in foregone quantity. The court was informed that waiving the quantity would wipe out a substantial portion of the net worth of banks.
The RBI had on March 27 final year announced a loan moratorium on payment of instalments of term loans falling due amongst March 1 and May 31, 2020, due to the pandemic, later the very same was extended to August 31.