Supreme Court Bars Charging Compound Interest Or Penal Interest On Any Borrower During Loan Moratorium; Refuses Moratorium Extension

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Case Title: Small Scale Industrial Manufactures Association(Regd) v Union of India and connected cases

Bench: Justices Ashok Bhushan, R Subhash Reddy and MR Shah

Case No: Writ Petition (C) No: 476 of 2020

Case Observation:  “…we are of the opinion that there shall not be any charge of interest on interest/compound interest/penal interest for the period during the moratorium from any of the borrowers and whatever the amount is recovered by way of interest on interest/compound interest/penal interest for the period during the moratorium, the same shall be refunded and to be adjusted/given credit in the next installment of the loan account”.

“…it is directed that there shall not be any charge of interest on interest/compound interest/penal interest for the period during the moratorium and any amount already recovered under the same head, namely, interest on interest/penal interest/compound interest shall be refunded to the concerned borrowers and to be given credit/adjusted in the next installment of the loan account”.

“…it is required to be noted that compound interest/interest on interest shall be chargeable on deliberate/willful default by the borrower to pay the installments due and payable. Therefore, it is in the nature of penal interest. By notification dated 27.03.2020, the Government has provided the deferment of the installments due and payable during the moratorium period. Once the payment of an installment is deferred as per circular dated 27.03.2020, non­-payment of the installation during the moratorium period cannot be said to be willful and therefore there is no justification to charge them interest on interest/compound interest/penal interest for the period during the moratorium”. Court refuses to grant a total waiver of interest

Therefore 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 as well as the lenders/banks. Therefore, when a conscious decision has been taken not to waive the interest during the moratorium period and a policy decision has been taken to give relief to the borrowers by deferring the payment of installments and so many other reliefs are offered by the RBI and thereafter by the bankers independently considering the Report submitted by Kamath Committee consisting of experts, the interference of the court is not called for”, the Court said.

“Even the government also suffered due to lockdown, due to unprecedented Covid­19 pandemic and also even lost the revenue in the form of GST. Still, the Government seems to have come out with various reliefs/packages. Government has its own financial constraints. Therefore, as such, no writ of mandamus can be issued directing the Government/RBI to announce/declare particular relief packages and/or to declare a particular policy, more particularly when many complex issues will arise in the field of economy and what will be the overall effect on the economy of the country for which the courts do not have any expertise”, the judgment said.

“While offering the financial relief packages, the financial constraint and/or financial burden on the government is also required to be considered and borne in mind, which can be considered by the experts and the government and the courts have not expertise to assess the financial burden”, the Court observed.


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