The Supreme Court ruled on Tuesday that compound interest on loans for all borrowers between March and August 2020 will be waived entirely. It’s nothing but a fiscal stimulus bearing an SC stamp and is, oddly, effective in retrospect. It may also be the first time that interest on interest is abolished uniformly, which will cost the state treasury 15,000 crore. Of this, the Center had presumably spent Rs 5,500 crore.
Hearing a batch of petitions, a three-judge bench headed by Justice Ashok Bhushan refused to allow a full waiver of loan interest, which the government has set at Rs 6 lakh crore. Such a sum could burden the earth and have a serious impact on the financial health of a chain of banks. The CS also refused to extend the moratorium period beyond August 2020.
Last October, the Center agreed to waive the interest-on-interest component for retail and small business loans of up to Rs 2 crore for six months. The benefit has been extended to MSMEs, education loans, home loans, durable consumer goods loans, credit card contributions, car loans, personal and business loans and home loans. consumption.
The waiver will now be extended to all borrowers, including large industries. Any amount received as compound interest will be adjusted to the next due payments. The SC also lifted the status quo on loans. This means that banks are now free to classify loans as bad if they so deem it and to make collections. NPAs are estimated to increase from Rs 1.3 lakh to Rs 8.5 lakh crore.
Moratorium Judgment on SC Loans: Everything Borrowers Need to Know
The Supreme Court ordered a waiver of compound interest for all borrowers. What does this mean to you ? If you took advantage of a loan moratorium or deferred your EMI payments (including credit cards) that were due between March 1, 2020 and August 31, 2020, interest is not waived and will continue to accrue on the unpaid balance because the banks have always had to pay interest to their depositors and pensioners.
During the period of the moratorium, however, interest on interest or compound interest (which the SC describes as penal interest) is abolished altogether. This means that while banks have already repaid compound interest paid by borrowers for loans below Rs 2 crore, only others (especially large industries) now need to be paid. The repayment or compound interest is adjusted to the next installment due instead of being paid back to the borrower regardless of the amount of the loan in question.
Will the regime be applicable to those who have not taken the moratorium?
The government had, in its October 2020 decision, clarified that the scheme would apply regardless of whether a borrower in the specified category took the moratorium in full, in part or did not take it at all.
Who will bear the cost?
The government has made it clear that it will bear the cost. The scheme is estimated to cost the government Rs 14,000 crore, according to brokerage firm ICRA. While the total cost borne by the government for small loans of up to Rs 2 crore was estimated at Rs 6,500 crore, the extended exemption will cost an additional Rs 7,000 to 7,500 crore.
Do I still have to pay additional interest if I choose the moratorium?
Yes, you will pay more interest if you choose to take advantage of the moratorium. Let’s see how it works. For example, you had taken a home loan of Rs 70 lakh at 9% interest for a period of 20 years. The monthly payment in this case amounts to Rs 64,400. If you choose to take the moratorium for three months, the interest will continue to accumulate, which amounts to Rs 1,58,684. This will be in addition to your overall liability. Thus, the total amount to be paid will be Rs 1,54,58,049. If the moratorium has not been applied, the total amount to be paid will be Rs 1,51,15,396. You will pay a higher amount when you reimburse the EMIs because if you had not opted for the moratorium, you would have ended up saving Rs 3,42,653.
“Fiscal policies are not subject to judicial review”
Noting that policy decisions are best left to government and regulators, the bench said economic policies are not subject to judicial review and courts can only intervene if there are dishonest and l ‘arbitrary.