Loan moratorium case: SC refuses extension, compound interest to be waived

The Supreme Court on Tuesday refused to extend the six-month moratorium offered by the RBI for the repayment of loans last year, stating that the decision is of the government and the RBI. The bench, hearing pleas from several trade associations and corporate bodies, further added that a complete waiver of interest during the moratorium is not possible and cited the burden on banks, approximated at 6 lakh crores, as the reason.

"To grant such a relief of total waiver of interest during the moratorium period would have a far-reaching financial implication in the economy of the country. Banks and lenders have to pay interest to the depositors. Their liability to pay the interest on the deposits continued even during the moratorium period…Continuing to pay interest to depositors is not only one of the most essential banking activities but it shall be a huge responsibility owed by the banks to crores and crores of small depositors, pensioners, etc, who survive on the interest from their deposits," Justice MR Shah said, as reported by The Hindu.

However, the bench ruled that every borrower, irrespective of the outstanding loan, must be eligible for the compound interest waiver in the period. If already collected, it would be refunded or adjusted, the court noted.

RBI had initially declared a moratorium on loans from March 2020 to May 2020 and then further till August 2020, given the financial crisis amidst the pandemic. On September 3, the Supreme Court had directed banks to not classify the borrowers' loans as Non-Performing Assets or bad loans. With the new verdict, however, banks can now categorize loans as NPA.