The Reserve Bank of India (RBI) announced a moratorium or deferment on bank loan EMIs up to 31 August 2020. The moratorium was granted initially until 31 May 2020 and later extended.
The moratorium is part of relief measure announced to enable borrowers to defer payments in an uncertain period marred by the pandemic COVID-19. The moratorium was provided on all credit facilities and term loans existing as on 1 March 2020. The RBI left the decision on implementing the moratorium to the discretion of the boards of banks and other financial institutions.
The banks charged interest on the deferred EMIs entailing higher costs for borrowers. As per the moratorium plan drawn by banks, there is an additional interest charge during the moratorium period. The interest charge is on the outstanding portion of the term loan or credit facility. The interest cost is high in the case of high-value loans and those with longer tenures.
A petition was filed before the Supreme Court of India (SC) by an individual, Mr Gajendra Sharma, challenging the levy of interest on interest during the moratorium period. The petitioner stated that the charge of interest during the moratorium period defeats the purpose of the relief.
The SC heard the petition and observed that the government should not leave the matter of interest charge to the banks, and should intervene. In an oral observation, the SC stated that it sees no merit in charging interest on deferred interest.
The banks argued stating that they have to pay interest to their depositors, and hence cannot waive the interest charged during the moratorium period. Also, a complete waiver of interest will result in financial risks and instability to the banks. The Indian Bank Association and State Bank of India argued that the situation is evolving, and to defer the hearing by three months.
The SC has asked the Central government and RBI to revisit the moratorium relief and to clarify on the matter of charge of interest on deferred interest. The SC has deferred the hearing on the petition until the first week of August 2020.
I am a Chartered Accountant by profession. I specialise in personal taxes and corporate income tax matters. I am an avid reader and track developments in financial markets, economy and other market developments.