SC gives Centre two weeks for final proposal on loan moratorium interest

Topics Supreme Court | loan waiver | loans

The top court had observed in June that the question is not of waiver of complete interest for entire moratorium period but it is limited only to interest charged on interest by banks
The Union government on Thursday set up a three-member expert committee, led by former Comptroller and Auditor General (CAG) Rajiv Mehrishi, to gauge the impact of waiving interest on loans for borrowers during the six-month moratorium period, which was in place to deal with the Covid-19 pandemic.

The move is a follow-up to “various concerns” that have cropped up during the ongoing hearing in the Supreme Court, which on Thursday passed an order giving the Centre and the Reserve Bank of India two weeks to submit a final proposal on the loan moratorium issue. The apex court decided to extend its interim order, saying no account be declared a non-performing asset (NPA) until further directions from the three-judge Bench.

The next hearing by the Supreme Court Bench, led by Justice Ashok Bhushan, will take place on September 28 and, the court made it clear on Thursday, no further adjournments will be given.

The committee, which has to submit its report within a week, will be “measuring the impact on the national economy and financial stability of waiving of interest and waiving of interest on interest on the Covid-19-related moratorium,” the finance ministry said in a statement.

The committee will also give suggestions to mitigate the “financial constraints of various sections of society”. This means that if banks are affected by the waiver of interest during the moratorium period, then the panel will suggest measures that the government can take to address their concerns, or if borrowers, particularly industries, are not given any interest waiver, then the steps that can be taken to help them, a finance ministry official said, requesting anonymity.

Other members of the committee include Ravindra Dholakia, ex-member of the Reserve Bank of India's (RBI's) monetary policy committee, and B Sriram, former managing director of State Bank of India.

Solicitor General Tushar Mehta, who represented the central government, said the government was considering all issues mentioned in the batch of petitions “at the highest level” and an appropriate decision would be taken within two weeks to deal with problems faced by different sectors during the pandemic.

The Bench said it was keen to waive interest on interest for the moratorium period as it saw it as penal interest. “Concrete decisions should be taken with clarity so that the matter does not get adjourned again,” the Bench noted.

The Bench was hearing a plea challenging levy of interest on loans during the moratorium period. The plea, filed by Agra resident Gajendra Sharma, has demanded a waiver of interest charged by banks on the instalments that have been deferred for repayment by the RBI through a six-month moratorium imposed in March.

“With the (Thursday’s) order, fresh NPA for banks, which are expected to rise in the second quarter, are unlikely to happen. However, we expect lending institutions to continue making prudent provisions on stressed accounts and disclosures to investors on potential impact on asset quality because of Covid-19, irrespective of the said order,” ICRA Vice-President and Sector Head (financial sector ratings) Anil Gupta said.

A number of industry bodies have joined the cause with the original petition demanding waiver of interest, or waiver of interest on interest, on the suspended monthly instalments during moratorium period. 

Senior Advocate Harish Salve, appearing for the Indian Banks' Association, said norms and guidelines had to be issued with regard to individual borrowers. The Bench asked who would formulate these norms, to which Salve replied that the Ministry of Finance would do, as it had been done at the level of the RBI. Mehta said it was being done at a level higher than the RBI and whatever would be there, it would be comprehensive. 

Broadly, all petitioners have argued that the government should not leave the issue of providing relief to borrowers to the RBI alone, which in turn, has left it to the discretion of lenders.

Salve told the court that the matter had become adversarial and urged the court to implead the banks' association in all the petitions on the issue. 

In a hearing on the same petition last week, the Bench had passed an interim order stating that those accounts which had not been declared NPAs as of August 31 should not be classified as such until further orders from the court, or unless the case was resolved. It had also observed that all decisions cannot be left to banks, and that the Centre and the RBI would have to come up with comprehensive solutions.

The pleas filed in the apex court have raised issue pertaining to validity of March 27 circular of the RBI, which allowed lending institutions to grant moratorium on payment of instalments of term loans falling due between March 1, 2020 and May 31 this year. Later, the period of moratorium was extended till August 31.

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