Loan Moratorium cannot be Extended Further- Supreme Court

By Nihit Nagpal and Anuj Jhawar

Extraordinary times call for extraordinary measures. The coronavirus pandemic has altered the equilibrium and status quo of the Indian economy. To give stimulus to the economy, the Government of India and Reserve Bank of India (RBI) have taken slew of measures to combat the liquidity crisis.  In this context, the RBI vide its circular dated March 27, 2020 had issued statement on Developmental and Regulatory Policies to mitigate the financial stress caused by COVID-19.[1]  The main highlight of the said circular was relief by banks and other financial institutions a moratorium of 3 months to the borrowers for loan installments falling due between March 1, 2020 and May 31, 2020. The announcement of Moratorium came as a sigh of relief for many borrowers as they were allowed a relaxation to defer the payment of EMI installments during the period as prescribed by RBI. The RBI thereafter extended the said period for another 3 months i.e. till August 31, 2020[2].

Moratorium and Relief Measures introduced by RBI amid COVID-19

While the moratorium prescribed by RBI was stipulated to expire on August 31, 2020, a batch of writ petitions were filed before the Hon’ble Supreme Court seeking extension of the moratorium period and waiver of accruing interest. The Apex Court while dealing with the said petitions, first granted an interim protection in the case of Gajendra Sharma v. Union of India & Anr  to the borrowers and directed that the loan accounts which have not been declared as NPA (Non- Performing Assets) till August 31, 2020 shall not be declared as NPA till further orders^[3]. On March 23, 2020, the Supreme Court bench of Justices Ashok Bhushan, R Subhash Reddy and M R Shah in a Small Scale Industrial Manufacturers Association (Regd.) v. Union of India, declared that no compound interest, interest on interest or penal interest shall be charged on installments due during the loan moratorium period and any amount which has been accrued during the said period shall be refunded to the respective borrowers.

Background

The writ petition first came up for hearing on September 03, 2020 before the Hon’ble Supreme Court..  While, Solicitor General, Mr. Tushar Mehta represented the Government of India, on the other hand Mr. Harish Salve represented the Indian Bank Association.

The initial submissions made by the Solicitor General are as follows:.

• He pointed out that the idea of moratorium was only to give relaxations to the borrowers to defer their EMIs thereby easing the financial burden caused by Covid-19 induced lockdown. There was no intention to grant a complete waiver of the interest loan amount.
• It was also stated that the banks and financial institutions are the backbone of the country and waiver of interest during moratorium would be prejudicial to the interest of banks and would also give undue benefit to the willful defaulters.
• It was also apprised that the government would be coming up with sector specific guidelines/plan soon which would contain appropriate reliefs for the borrowers.

On the other hand, Mr. Salve on behalf of Indian Bank Association made the following submissions before the Hon’ble Court:

• He assured the Hon’ble Court that the loan accounts will not automatically be declared NPA from September 01, 2020 as once the moratorium is over then a default period of 90 days shall commence and the moratorium period is not included in the default period.
• Further, he submitted that the Individual and industrial problems need to be addressed differently for providing a specified relief and the financial issues faced by bank should not be neglected.

With respect to the levying of compound interest (interest on interest), the Hon’ble Court had observed that RBI needs to clarify on this position as moratorium and penal interest cannot go together. Further, the bench also observed that the government has taken steps to mitigate the financial challenges of borrowers however, in such a situation more measures would be needed to alleviate the hardships faced by the borrowers. Further, the Hon’ble Court opined that the main grievance of the Petitioner was that they have not been given adequate relief under the National Disaster Management Authority (NDMA) and the disaster authority has not been active to provide adequate relief.

The Hon’ble Court resumed its hearing on September 10, 2020 to decide the issue of loan moratorium, interest waiver and other related issues. However, the hearing on the issue was further deferred by the Court till September 28, 2020., While the Hon’ble Court maintained the current status quo, it directed that the interim order passed vide order dated September 03, 2020 shall continue. The Solicitor General, Mr. Tushar Mehta on behalf of the Central Government and RBI had informed the Learned Bench that an expert committee had been constituted at the highest level which has been considering all issues that have arisen in this writ petition. In this regard, additional time was sought by the Central Government to file an affidavit for bringing on record the decision taken by them with the RBI. The Hon’ble Supreme Court had granted 2 weeks’ time to file appropriate affidavit replying to the issues which have arisen in the matter and had directed that all decisions taken by RBI, Government of India or Banks should be placed before its consideration.

During the course of hearing, several other issues like levying of interest, downgrading of borrowers credit rating were also raised before the Hon’ble Court.

Additional affidavits were filed on behalf of both the respondents, highlighting the Government of India, Ministry of Finance’s letter dated October 23, 2020 pertaining to COVID-19 relief titled as “Scheme for grant of ex-gratia payment of difference between compound interest and simple interest for six months to borrowers in specified loan accounts (March 1, 2020 to August 31, 2020)”[4] inclusive of operational Guidelines and mechanism for such grant. Pursuant to the aforementioned letter, RBI issued a circular dated October 26, 2020[5] in favour of all the Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks), All Primary (Urban) Co-operative Banks/ State Cooperative Banks/ District Central Co-operative Banks, All India Financial Institutions and All Non-Banking Financial Companies (including Housing Finance Companies) to follow necessary sanctions as provided under the letter dated October 23, 2020.

Submissions were heard by the Hon’ble Court on November 19, 2020 in various tagged applications and writ petitions including W.P. (C) No. 825/ 2020, I.A No. 96215/ 2020. W.P 608/2020 and the Ld. Counsel for the parties were directed to submit their suggestions to the Ld. Solicitor General for the Government of India and the Ld. Counsel for the RBI.[6] In the course of the petitions, Ld. Counsel for the petitioner submitted that Central Government’s decision to waive off interest in eight categories of loans with a paid up amount up to 2 crores has “come as a great relief”.

The final judgment in Gajendra Sharma case was passed on November 27, 2020 by the three judge bench of the Hon’ble Supreme Court of India, headed by Justice Mr. Ashok Bhushan where it was held “The case of the present petitioner, who has taken housing loan is fully covered by the decisions of the Union of India as noted above, since the benefit has been extended to the housing loan upto Rs.2 Crores, i.e., in pursuance of the aforesaid decisions of the Government of India, the Ministry of Finance had issued order dated 23.10.2020”.  The present petition was thereby disposed off and the respondents were directed to take up all the necessary steps in accordance with circular of 23.10.2020.

Pursuant to the aforementioned judgment dated November 27, 2020[7], in a connected matter[8], the Hon’ble Supreme Court of India heard petitions pertaining to extension of loan moratorium period and waiver of accruing interest.  The Ld. Counsel for the petitioner urged that people are suffering financially every day and a cogent solution needs to be implemented by the RBI in this regard. Following this, the Reserve Bank of India (RBI) and Indian Banks Association (IBA) pleaded the Supreme Court not to pass any further orders on similar petitions until an empirical and comprehensive data is collected. After hearing arguments from both the parties, the three-bench judge of Hon’ble Supreme Court headed by Justice Mr. Ashok Bhushan reserved the verdict on December 17, 2020.

On March 25, 2020, the Supreme Court bench of Justices Ashok Bhushan, R. S. Reddy and M. R. Shah passed their judgment on the issue of extension of moratorium period and waiver of interest accrued therein. In the extensive 148-page judgment, the Court pointed that in case further extensions are granted beyond the six-month moratorium period as announced by RBI in the press conference dated May 22, 2020, the accumulated interest is likely to heap up to 6 lakh crores. Keeping in view the economic capacity of the nation, banks being the financial backbone shall not be able to take up additional economic loss arising out of deferred interest.

Vide the aforementioned judgement, the Apex Court emphasized that there is no justification whatsoever to restrain the relief of not charging interest on interest, with respect to loans amounting up to Rs 2 crores. It was further pointed out that financial hardships were faced by loan defaulters and the need to defer interest during moratorium period was a cogent one.

Furthermore, all petitions seeking the following reliefs were rejected by the Hon’ble bench[9]–

• Extension of loan moratorium period
• Complete waiver of interest accrued during the moratorium period
• Extension of period of resolution mechanism as provided under RBI circular dated 06.08.2020[10]
• Sector-specific relief to be proposed by RBI
• Additional reliefs to be proposed and implemented by the Central Government/ RBI over and above the existing relief packages.

While rejecting the above-mentioned petitions, the Hon’ble Court emphasized that numerous relief packages are proposed by Ministries and Central Government in view of the COVID-19 pandemic to the disaster affected borrowers. Some of the relief packages are as follows:

Finally, the Court concluded that all the installments due between the declared moratorium periods as per circular dated 27.03.2020 cannot be termed as willful and deliberate. Any installments collected shall be refunded and adjusted / credited in the next installment due against the loan account. Thus, all the petitions and connected interlocutory applications were disposed off.

 

[1] https://rbidocs.rbi.org.in/rdocs/Notification/PDFs/NOTI186B27003E9DB3D4FB49BDDF955F4289D68.PDF

[2] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/250ISS1B6B55D87E8D40FF97D3B93DF923F1A5.PDF

[3] https://main.sci.gov.in/supremecourt/2020/11127/11127_ _34_16_23763_Order_03-Sep-2020.pdf

[4] https://financialservices.gov.in/sites/default/files/Scheme%20Letter.pdf

[5] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11989&Mode=0

[6] https://main.sci.gov.in/supremecourt/2020/11127/11127_2020_36_42_24717_Order_19-Nov-2020.pdf

[7] https://main.sci.gov.in/supremecourt/2020/11162/11162_2020_37_40_25111_Order_17-Dec-2020.pdf

[8] Small Scale Industries Manufacturers Association (Regd.) v. Union of India & Ors [WrP. (C)  No. 476/2020

[9] https://main.sci.gov.in/supremecourt/2020/11162/11162_2020_35_1501_27212_Judgement_23-Mar-2021.pdf

[10] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11942&Mode=0