Supreme Court Orders Compound Interest Waiver For All Borrowers

India’s Supreme Court has ordered a compound interest waiver for all borrowers who took advantage of a loan moratorium last year as part of the central bank’s Covid-related relief measures.

The Supreme Court found no justification for extending the waiver of compound interest or interest on interest only for loans up to 2 crore rupees, it said in a judgment on Tuesday. During the hearing of the case, the central government agreed to absorb the cost of interest on small loans of up to Rs 2 crore each for eight categories of borrowers. The total cost borne by the government was then estimated at Rs 6,500 crore.

Now, the highest court has declared that compound interest for all borrowers on a moratorium, regardless of the amount or category of the loan, must be waived and ordered that the amounts already recovered as interest on the loans. interest for the moratorium period be adjusted by the banks. The ICRA estimates that the extended waiver will cost an additional Rs 7,000-7,500 crore. “According to our estimates, compound interest for six months moratorium for all lenders is estimated at Rs 13,500-14,000 crore”, said Anil Gupta, Vice President – Financial Sector Rating at ICRA Ltd.

The Supreme Court also lifted the suspension granted on the classification of non-performing assets by banks. The interim relief granted earlier for not reporting the accounts of the respective borrowers while the NPA is vacant, said the order of the court consisting of Judge MR Shah, Judge Ashok Bhushan and Judge R Subhash.

The Supreme Court, however, rejected other pleas in the case, including a complete waiver of all interest, an extension of the moratorium period on loans, as well as requests to order the Reserve Bank of India and the government to grant new measures as well as some specific sectoral relief.

” When offering the financial aid packages, the financial constraint and / or the financial burden of the government should also be considered and taken into account, which can be taken into account by experts and the government and courts do not have the expertise to assess the financial burden, ‘the court’s highest decision said

In 2020, the RBI authorized banks to grant a moratorium on term loans to help mitigate the economic blow from the pandemic. The moratorium, which was initially for three months until May 31, was later extended until August 31.

The Supreme Court case began with a public interest dispute brought by Gajendra Sharma, a borrower seeking relief from interest payable during the moratorium period. The discussion on the scope of the relief before the higher court was gradually limited to a waiver of the part of the compound interest (interest on interest) applicable during the moratorium.

It was during those hearings that the Supreme Court in September issued an interim order stating that accounts that were not overdue like August 31 would not be declared NPA until further notice.

In October 2020, the government told the Supreme Court that it had decided to waive compound interest on loans up to 2 crore rupees for eight categories of borrowers, mostly retail and small businesses. Sectors affected by the Covid, such as electricity, hotels, have requested another specific remedy from the court.

The RBI, however, informed the court that the banks would decide on such relief via a loan restructuring under a special Covid waiver. This restructuring window closed on December 31.

However, the suspension of the overdue loan account declaration remained in effect. But banks have released pro forma figures for the quarters ended September and December 2020, keeping investors informed of the strain on balance sheets.

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