The Supreme Court has stopped banks from charging compound interest or penal interest on any loan, irrespective of the amount, during the moratorium period. A three-judge Bench of Justices Ashok Bhushan, Subhash Reddy, and M R Shah spoke that the amounts taken as compound interest or penal interest should be adjusted in future loan payments.

 

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Though, the court agreed with the RBI that extending the date of the loan moratorium was not viable. The court stated that the judicial review over fiscal policies was limited and that it cannot order specific financial reliefs. The court also asked the justification of limiting compound interest waiver to loan up to just ₹ 2 crores. On October 23, last year, the government launched a pay-back scheme that waived the difference in the compound interest and simple interest charged between the moratorium period (March 1 and August 31) of loans worth up to ₹ 2 crores, for eight categories consisting of auto, credit card, consumer durables, consumption, education, housing, MSME, and personal loans. The lending institutions involved banking companies, public sector banks, cooperative banks, regional rural banks, Indian financial institutions, NBFCs, housing finance companies registered with the RBI, and national housing banks. The court directed the Centre to implement the pay-back scheme in November last year, yet, the borrowers continued to push for an extension of the moratorium, while also arguing that the entire interest for the moratorium period should be scrapped. The petitioners said that the ₹ 2 crores pay-back scheme didn't bring any aid to the big borrowers who were reeling under the impact of the pandemic.

While reserving the case for judgment on December 17 last year, the Indian Banks Association stated that the pleadings made by the petitioners extended beyond the financial stress which they suffered during the pandemic, while the Centre stated that a complete waiver of interest would cripple the economy and banking sector. SBI appealed in support of the small depositors stating that the small depositors are faceless in these proceedings asserting that it is not a case of borrowers versus a bank and that the small borrowers are the backbone of the financial system.

RBI cited clause 3 of its August 6 circular 'Resolution Framework for COVID-19-related Stress' pointing out to the lending institutions, guided by their corresponding Board-approved policy, to prepare viable resolution plans for eligible borrowers emphasized on account of COVID-19.

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