SC directs lenders to refund penal interest on EMIs

Content:

Highlights of the Ruling :

Waiver of compound interest and Penal Interest on EMI:

• The Supreme Court (SC) has directed waiver of compound interest for all loans during the moratorium period. Banks and financial institutions will have to refund compound interest, interest on interest or penal interest collected on EMI for loans during the period of moratorium from March 1 to August 31 in the year 2020.

Govt’s restriction on interest waiver irrational:

• The court questioned Centre’s rationale to restrict compound interest relief only to loans upto Rs. 2 crores.
• The judgment concluded that the government’s scheme to restrict the waiver of interest on interest to loans worth only up to ₹2 crore was irrational. This scheme, introduced in October, was limited to debts in MSME, education, housing, consumer durables, credit card, auto, personal and consumption categories within the ₹2 crore limit.

Rejected extension of loan moratorium and RBI’s Resolution Framework deadlines:

• The SC rejected the requests to extend the loan moratorium period beyond August 2020. It ruled that extension can’t be granted to protect the interests of bank depositors and financial health of lending institutions.
• The court further declined pleas to extend the deadline, from December 31, 2020, for the invocation of the Reserve Bank of India’s resolution mechanism for “big borrowers” like business and manufacturing sectors. The mechanism titled ‘Resolution Framework for COVID-19-related Stress’, issued in an August 6 circular, had informed that lending institutions, guided by their respective Board-approved policy, would prepare viable resolution plans for eligible borrowers under stress on account of COVID-19.

Covid-19 Reliefs do not Violate Article 14:

• The court refused to entertain complaints from petitioners that the government did not do enough to ease the financial strain during the pandemic. 
• “Merely, since the reliefs announced by the Union of India/RBI may not suit the desires of the borrowers, the reliefs/policy decisions related to COVID-19 cannot be said to be arbitrary or violative of Article 14 of the Constitution,” the court said.

Refused total interest waiver:

• The apex court further refused the insistent pleas of the borrowers for a total waiver of interest for EMIs falling within the moratorium period.
• The court said a total waiver of interest on loan EMIs would hit the banks and depositors hard.

Allowed RBI and banks to declare bad loan accounts as NPAs:

• It also allowed RBI and banks to declare bad loan accounts as NPAs. 
• The apex court lifted the nearly six-month ban on them from declaring accounts of borrowers as non-performing assets (NPAs). In October last year, the apex court had stopped banks and lenders from declaring accounts of borrowers as NPAs.

Verdict on other issues:

• The court held that it won’t pass any further orders to Centre and RBI, as there is limited scope of judicial review on economic policy decisions which are best left to the Union Government and the RBI to decide based on expert opinion.
• The court refused to ask Centre to announce economic reliefs after losing on revenue collection due to the lockdown, saying that it is not an advisor to the Government on financial policy.
• The court dismissed arguments made by various industries which sought financial relief by the Centre under the Disaster Management Act, observing that while the Union Government had already taken action under the Act, the functions of all ministries can’t be done by the National Disaster Management Authority (NDMA) during a pandemic. 
• The order noted that judges can’t be expected to have economic expertise, and shouldn’t decide on economic policy even if the petitioners contend that a better policy could be implemented.

Importance of the Ruling

The judgment was welcomed by banking sector experts who said it has offered much-needed clarity to the financial industry on interest waiver and bad loan classification.

Rejection of complete interest waiver has given breathing space for Government and Banks:

• According to government estimates, the burden of a complete interest waiver on the banking system could have been around Rs six lakh crore. 
• Waiving off the total interest amount would hurt the banking system as banks need to pay interest to depositors.
• This would have been a shocker for a fiscally constrained government or a capital-starved banking system to absorb. 
• Luckily, SC rejected the demand for a total waiver.

Relief for borrowers

• the compound interest waiver has provided relief to all borrowers especially big borrowers (Rs 2 Crore and Above) who were earlier excluded from the loan moratorium scheme
• 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

Eases Asset Classification

• SC had, on September 3, put a stop on the classifying loans as NPA to help COVID-hit borrowers. It has asked banks not to tag accounts that were standard as on August 31, as NPAs.
• This created difficulties for industry in terms of asset classification. 
• The RBI had said that a failure to lift the interim stay could undermine the central bank’s regulatory mandate. 
• Around the same time, the Indian banks association (IBA), too, raised a similar demand saying the stay has made banks helpless to do proper monitoring of the asset quality. 
• Later, in December 2020, the finance ministry also said it was finding it difficult to make a proper assessment of the recapitalisation needs of the PSU banks due to the SC stay.
• Lifting of  interim stay on banks’ asset classification will ease the asset classification.

Return to Normalcy:

• The lenders can now recognise their NPAs and start taking appropriate corrective action for recoveries.
• This will allow regular functioning of the banking system and ensure the economy continues its course to normalcy.