The Supreme Court prohibits the imposition of compound interest or penal interest on any borrower during the loan moratorium; Refuse the extension of the moratorium
[Story updated with judgment]The Supreme Court ruled on Tuesday that there should be no compound interest, interest on interest or criminal interest on installments that were due during the loan moratorium period from March 1 to August 31 from last year to no borrower, regardless of the loan amount. . If this interest has already been collected, it must either be reimbursed to …
[Story updated with judgment]
The Supreme Court ruled on Tuesday that there should be no charges of compound interest, interest on interest or penal interest on the payments that were due during the loan moratorium period from March 1 to August 31 of last year at any borrower, regardless of the loan amount. If this interest has already been collected, it must either be reimbursed to the borrower or adjusted on the next monthly payments.
The bench observed that there is no justification in Center policy to limit the benefit of the compound interest waiver only to certain categories of loans below Rs Two Crores. Last year, the Center had made a decision to allow for waiver of interest on interest in eight categories specified for loans up to 2 crore rupees.
The Court observed that there is no demonstrated justification for restricting the exemption from non-charging of interest on interest on loans up to only Rs. 2 crore and this too narrowly restricted to the above categories.
Describing this policy of the Center as “arbitrary and discriminatory”, the Court ruled:
“… we are of the opinion that there will be no interest charge on interest / compound interest / penal interest for the period during the moratorium of one of the borrowers and regardless of the amount recovered at average interest on interest / compound interest / penal interest for the period during the moratorium, these will be refunded and will be adjusted / credited in the next installment of the loan account “.
The Court ordered:
“… it is ordered that there is no charge of interest / compound interest / penal interest for the period during the moratorium and any amount already collected under the same head, namely, interest / penal interest / interest compound interest will be refunded to affected borrowers and credited / adjusted in the next installment of the loan account ”.
In this regard, the Court observed that compound interest is in the nature of “penal interest” as it is taxable in the event of the borrower’s willful / willful failure to pay installments due and payable. Once the RBI has authorized the determination of the down payments, the non-payment of the down payment during the moratorium period cannot be characterized as voluntary and there is therefore no justification to charge. interest on interest / compound interest / penal interest for the moratorium period.
Court refuses to grant full waiver of interest
At the same time, the Court observed that it was not possible to order the total waiver of interest during the loan moratorium period, as banks have to pay interest to depositors, retirees, etc. Banks also have to deal with administrative expenses. There may be several provident fund schemes, specific to a category and to a sector, which can survive and are implemented on the basis of the interest generated by their deposits.
“Therefore, granting such relief from the total waiver of interest during the moratorium period would have far-reaching financial implications for the economy of the country as well as the lenders / banks. Therefore, when a conscious decision has been made not to waive the interest during the moratorium period and a political decision has been taken to give relief to borrowers by postponing the payment of down payments and so many other reliefs are offered by the RBI and subsequently by the bankers in taking into account independently the report submitted by the Kamath Committee composed of experts, the interference of the court is not required “, said the court.
No extension of the moratorium on loans
In addition, the Court rejected the applicants’ request to extend the 6-month loan moratorium period granted by the Reserve Bank of India due to the COVID-19 pandemic. The bench also rejected the other relief measures requested concerning the extension of the invocation period of the resolution mechanism and the additional sectoral packages.
The Court also quashed the interim order issued on September 3 last year, which suspended reporting of those accounts as NPAs, which were not NPAs as of August 31, 2020.
Limited scope of judicial review in matters of economic policy
The Court ruled that in matters of economic policy, the scope of judicial review is very limited. Financial policy is an area in which the courts must act with caution, because judges are not experts. How the financial envelopes and the relief are to be provided should be decided by the central government with the help and advice of expert bodies such as the Reserve Bank of India.
The courts cannot intervene even if a second vision of politics is possible. The legality of politics and not the merits of the wisdom of politics is subject to judicial review. Courts are not appellate bodies or advisers in matters of executive policy.
The judgment cites a series of Supreme Court precedents that emphasize the limited scope of judicial review, except in cases of flagrant illegality or bad faith.
The Court ruled that no mandamus warrant can be issued to order the central government or the Reserve Bank of India to provide assistance to particular sectors in addition to the sectors already identified. It is not for the Court to decide what should be the nature of the financial relief that should be granted.
A bench including Judges Ashok Bhushan, R Subhash Reddy and MR Shah delivered the verdict in the case Association of Small Scale Industrial Manufactures (Regd) v Indian Union and related matters.
The court reserved the judgment on December 17 last year after hearing the applicants, the Center, RBI and interveners.
The government also suffered economic losses during the pandemic
The judgment drafted by Judge MR Shah observed that the government also suffered from an unprecedented pandemic and loss of revenue from TPS. The government has its own financial concerns. The pandemic has affected all sectors, including government. The government may have its own priorities as it has to spend in various areas like health, medicine, provision of food / shelter, organization of transport of migrants, etc.
Even the government has also suffered due to the lockdown, due to the unprecedented Covid19 pandemic and even lost the revenue in the form of GST. Yet the government appears to have offered various reliefs / packages. The government has its own constraints Therefore, as such, no mandamus warrant can be issued directing the government / RBI to announce / declare particular contingency plans and / or declare a particular policy, especially when many complex issues will arise. in the field of the economy and what will be the overall effect on the economy of the country for which the courts have no expertise ”, said the judgment.
It cannot be said that the Center has not taken action in the context of COVID19, the judiciary observed, after mentioning some of the relief plans announced by the Union government under the “Arma Nirbhar” programs. Bharat ”,“ Garib Kalyan ”.
“While offering the financial aid packages, the financial constraint and / or the financial burden on the government must also be taken into account and kept in mind, which can be taken into account by experts and the government. and the courts do not have the expertise to assess the financial burden. “, observed the Court.
The Court rejects the following remedies
The Court rejected the following remedies requested by various applicants:
(i) full waiver of interest during the moratorium period;
(ii) extend the moratorium period;
(iii) extend the time limit for invoking the resolution mechanism, namely 31.12.2020 provided for by circular 6.8.2020;
(iv) that there will be sectoral relief provided by the RBI; and
(v) that the central government / RBIm should provide additional relief in addition to the relief packages already offered.
The court allowed the motions to a limited extent by ordering that no compound interest, interest on interest or penal interest be charged to a borrower during the moratorium period.
The Reserve Bank of India issued a notification dated 03/27/2020 to allow banks and financial institutions to grant a 03 month moratorium on payments of all tranches of term loans maturing between March 1, 2020 and May 31, 2020. This period was subsequently extended. 3 additional months until August 31, 2020.
The petitioners originally called for an extension of the moratorium until December 31. One of the petitioners, lawyer Vishal Tiwari, then asked for an extension until March 31, 2021, saying the current situation demands and needs the same.
On November 19, the Center had urged the court not to intervene and to grant additional relief to borrowers under Article 32, because the government was already “on top”.
Solicitor General Tushar Mehta told the court that many plans and contingency plans had been developed with technical experts and that court intervention in fiscal policy matters was not necessary.
On November 28, 2020, a bench led by Judge Ashok Bhushan had ordered the Center to implement the decision taken by the Center to waive interest for 8 specified categories up to Rs 2 crores.
The categories in which the Center and the RBI agreed to waive compound interest during the loan moratorium period are:
(i) Loans to MSMEs up to Rs. 2 crores
(ii) Student loans up to Rs. 2 crores
(iii) Home loans up to Rs. 2 crores
(iv) Durable consumer loans up to Rs. 2 crores
(v) Credit card charges up to Rs. 2 crores
(vi) Car loans up to Rs. 2 crore
(vii) Personal loans to professionals up to Rs. 2 crores
(viii) Consumer loans up to Rs. 2 crores
Case title: Small Scale Industrial Manufactures Association (Regd) v Union of India and related cases.
Bench: Judges Ashok Bhushan, R Subhash Reddy and MR Shah
Reference: LL 2021 SC 175