Supreme Court Orders Waiver Of Compound Interest For All Borrowers

What is the News?

The Supreme Court has directed banks and financial institutions to refund compound interest collected on EMI (Equated Monthly installments) for loans. Calculation of the refunds will happen for the period of the moratorium from March 1,2020 to August 31, 2020.

Note: Calculation of simple interest is on the principal or the original amount of a loan. On the other hand, compound interest is calculated on the principal amount plus accumulated interest of previous periods. Thus, it can be regarded as “interest on interest”.

RBI Loan Moratorium Scheme:

• In March 2020, the RBI announced a loan moratorium scheme. It directed lending institutions to grant temporary relief to borrowers in payment of instalments of term loans. Initially, the period between 1 March 2020 and 31 May 2020 was included. Later, there was an extension of the moratorium till 31 August.
• Categories: The loan moratorium scheme was limited to eight categories only: MSME (Micro, Small & Medium Enterprises), Education, Housing, Consumer durable, Credit card, Automobile, Personal and Consumption.
• Loan Amount: The aggregate outstanding loan was to be Rs. 2 crores or less to be eligible for the scheme.

What petition was filed before the Supreme Court?

• A petition was filed in the Supreme Court regarding the charging of compound interest by banks. The amount was not paid by borrowers after availing of the loan moratorium scheme of RBI from March 1 to August 31.
• Further, the petitioners were also seeking an extension of the loan moratorium and other reliefs in view of the coronavirus pandemic.

Key Takeaways from the Supreme Court Verdict:

• Firstly, there will be no compound interest during the loan moratorium period irrespective of the loan amount. Any such amount collected shall be refunded.
• Secondly, if the refund is not possible, the compound interest collected shall be adjusted in the next installment payable.
• Thirdly, the court provided relief to banks. It removed its nearly six-month bar on the banks from declaring accounts of borrowers as non-performing assets(NPAs).
• Further, the Court has declined to extend the six-month loan repayment moratorium. It said the power to take such a decision lay with the government and Reserve Bank of India(RBI).

Source: The Hindu