On March 27, RBI asked financial institutions to allow the borrowers a moratorium on loan instalments that fall between March 1 and May 31. On May 22, the moratorium was further increased until August 31.
The Supreme Court on Monday deferred the case on the extension of the loan moratorium and waiver of the interest on interest till October 5. The direction came after the Centre sought until October 1 to make a decision.
On March 27, RBI asked financial institutions to allow the borrowers a moratorium on loan installments that fall between March 1 and May 31. On May 22, the moratorium was further increased until August 31.
This 'interest on interest' case originated when a borrower who availed moratorium on his home loan petitioned in the SC that he should not be charged interest on the delayed interest installments.
However, charging interest on someone who delays interest payment is a normal banking practice. In its last hearing, the court had asked the government to place its decision on this issue before September 28.
In September 2020, the Mehrishi committee had suggested that the government bear the burden of the interest waiver and not the banks.
The significance of the issue
As a reply to the notice issued by the SC, RBI said in June that waiver of interest might risk the financial viability of the banks, which in turn may put the depositors in jeopardy.
RBI further explained that a loan is a commercial contract between the lender and borrowers and that the interest rate reflects the same. The bank said that the benefits of an interest waiver enjoyed by borrowers would entail a cost which must not be transferred to banks.
According to RBI, this forced waiver of interest will hurt banks by as much as Rs 2 lakh crore (1 percent of GDP) which will destabilise the financial system of the country.
In March, the RBI had announced a moratorium on the repayment of term deposits for three months, which was later extended to August 31. The move was intended to give borrowers more time to clear their payments amid the pandemic that had lead to economic fallout.
In August, noticing the Centre's alleged inactivity, the apex court had asked it to clarify its stand within a week on the waiver of the compounded interest.
SC had alleged that the government was hiding behind the RBI despite the fact they had ample powers under the Disaster Management Act.
Consequently, the court had nodded its yes when the Solicitor General Tushar Mehta had asked a week to file a response. The court had deferred the hearing on the matter till September 1.
On September 2, Mehta had told SC that they had two options - write off the interest or ease the burden of repayment of loans.
On September 10, the apex court indicated to pass an order against the levy of interest on interest.
In the previous hearing on September 3, the court asked the banks not to declare the accounts as NPAs for another two months.
The hearing will resume on October 5.