The Coronavirus Pandemic has caused Governments worldwide to impose lockdowns, bringing the entire world economy to a sudden standstill. With such a major up-haul of normal life functioning as we know it, people and companies both lost their revenue for months at an end while facing the dilemma of having to make payments on any debt that they might have availed.
Keeping in mind the situation and impact it could have on people and businesses, the RBI declared a moratorium to be issued by Banks to its borrowers. The moratorium basically meant that the borrower got an option to delay all debt payments by the Moratorium Period (6 months now) without any impact on their Credit Scores. Most banks were glad to comply with this and extended the terms to their borrowers.
However, now there is a heated discussion going on between the Supreme Court and the RBI regarding an Interest Waiver on the Debt Payments during the Moratorium Period. Before we can form a view on what that means, let’s understand its terms.
What exactly is the Supreme Court asking RBI and Banks to waive off?
Contrary to popular belief, the Supreme Court isn’t asking banks to waive off the interest on the loan. That amount is being included in the moratorium. However, several banks have opted to charge interest on this delayed interest portion as well during the Moratorium. Supreme Court has asked Banks to waive off this Interest on Interest Portion for the duration of the Moratorium as it undermines the purpose of the moratorium.
Why has the Supreme Court taken up this issue?
The Supreme Court took up the case when a plea was filed by an Agra Resident, Gajendra Sharma, with the courts regarding the same. Noting the magnitude of impact such a decision can have, the Supreme Court took up the case and raised the concern with RBI and the Finance Ministry, asking them to respond to the plea.
Interest on Interest Payments can be a huge concern for corporations having high debt and high-interest payments as well as for individuals utilizing the moratorium for Credit Card Payments. Anyone who uses a Credit Card is aware of the exorbitant interest charges that are imposed on delayed payments and would definitely be worried if they had to pay interest on the interest accumulation as well (for a 6 month period!).
What are the main argument points on both sides?
Petitioners i.e. the one who filed the case: The counsel appearing on behalf of the petitioners argued that borrowers were being wrongly penalized by the Banks on availing of the Moratorium Period, with banks charging interest on the outstanding interest amounts as well.
Defense: The counsel appearing on behalf of the Banks has said that it is unfair for the Supreme Court to ask them not to charge this Interest Amount as Banks are still paying interest to their depositors. They argued that a waiver on such interest could put extremely high stress on Bank Balance sheets and could even jeopardize the interests of Bank Depositors.
In the latest hearing on the matter (17th June, 2020), the Supreme Court stated that there was no merit in banks charging interest on interest for deferred payments during the Moratorium Period.
The rationale behind this comment by the Courts was that implementation of “Interest on Interest” was counter-intuitive to the purpose of the Moratorium Period declared and that Government Intervention was required to ensure that the purpose of the moratorium was served.
The Bench has posted the hearing to be held in the first week of August, 2020 in order to allow the RBI and the Centre to review the situation. They have also asked the Indian Banks Association to examine whether it is possible for them to issue new guidelines regarding the moratorium issue for the time-being.