Compound interest

Indian Supreme Court waives compound interest on ALL loans put under moratorium due to COVID-19 pandemic

  • Banks in India cannot charge interest on accrued interest during the period in which borrowers have been allowed to withhold repayments.
  • The Reserve Bank of India (RBI) had allowed borrowers to defer payments following the economic crisis following the COVID-19 pandemic.
  • However, while the repayments had ceased, interest continued to be accrued by the banks and, therefore, the borrower would ultimately have had to shoulder the entire burden.
  • With this decision, the highest court also declared that any amount perceived as interest on interest, will be reimbursed to the borrower.
  • Check out the latest news and updates on Business Insider.

The Supreme Court of India ordered the waiver of interest on all moratorium loans, not just those amounting to ₹ 2 crore.

“We believe there will be no interest on interest or compensatory interest during the moratorium period, regardless of the amount of the loan. Any amount collected will be refunded ”, said Judge MR Shah according to
Bar & Bench. He added that if a refund is not possible, the interest on the interest received will be adjusted with the next installment due.

However, the court suggested that compound interest could be charged in cases of willful and willful defaults.

The court also said there would be no extension of the moratorium period or an offer to restructure the loans.

Supreme Court rejects requests for waivers of total interest and sector relief
While the Supreme Court waived interest on interest on all loans, regardless of the amount, borrowers will still have to pay interest on the principal amount even during the moratorium period.

The bench explained that waiving full interest is not possible since banks have to pay interest to account holders and retirees.

He added that if sector-specific relief is to be granted, it will be granted by the RBI. Other reductions in addition to the packages already offered will not come from the Supreme Court ruling.

The electricity industry, for example, wanted the court to “patch up” the flaws in RBI’s restructuring plan. Similar demands have been made by the real estate industry, educational institutions, mall owners and other industries that have suffered the brunt of the COVID-19 pandemic.

The court explained that it had the expertise to interfere in these cases. The economic packages and relief to be provided are within the scope of the RBI and the government.

“The court will not go into an inquiry into whether public policy is wise or whether better policy can be crafted. Economic and fiscal policies cannot be subject to judicial review and the mere fact that a sector is not happy with a decision interferes unless there are malafides and l ‘arbitrary in said political decision,’ said the Supreme Court order.

The story so far
In March of last year, the RBI announced that borrowers affected by the COVID-19 pandemic could defer interest payments on their loans until May 31, 2020.

The move was intended to provide relief to individuals and businesses that have been affected by the COVID-19 pandemic without turning into a bad loan or non-performing asset (NPA).

As the pandemic continued and economic growth contracted further, the RBI extended the moratorium period until August 31, 2020.

However, as they say, there is no free lunch. Banks were willing to defer interest payments, but charged compound interest on the delay, adding to the burden on long-term borrowers.

After public outcry, the Indian government then issued a notice waiving interest on loans up to 2 crore yen for eight categories of borrowers. But, that didn’t hit the high mark with borrowers who weren’t covered by this network, leading petitioners to please file with the Supreme Court for further relief.

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