INTEREST ON INTEREST DURING MORATORIUM HELD ILLEGAL In the month of March 2020, due to the Global Outbreak of the COVID-19 Pandemic, India also became a victim and the Government of India was constrained to announce a national lockdown for 21 day. The Government of India issued an order dated 27.3.2020 invoking the provisions of section 6(2)(1) of The Disaster Management Act 2005. The...
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INTEREST ON INTEREST DURING MORATORIUM HELD ILLEGAL
In the month of March 2020, due to the Global Outbreak of the COVID-19 Pandemic, India also became a victim and the Government of India was constrained to announce a national lockdown for 21 day. The Government of India issued an order dated 27.3.2020 invoking the provisions of section 6(2)(1) of The Disaster Management Act 2005. The relevant portion of the said order read as follows:
"Now, therefore, in exercise of the power under section 6(2)(1) of the Disaster Management Act 2005, the National Disaster Management Authority has decided to direct Ministries/Departments of Government of India, State Government and State Authorities to take measures for ensuring social distancing so as to prevent the spread of COVID-19 in the country. Necessary guidelines in this regard shall be issued immediately under section 10 (2)(1) of the Disaster Management Act, 2005 by the National Executive Committee. These measures shall be in force for a period of twenty one days w.e.f 25th March, 2020."
On the same date, the RBI issued a statement of development and regulatory policy by which they announced certain regulatory measures to mitigate the burden of debt servicing due to COVID-19 pandemic and to protect the existing business relevant portion of this public statement announced by the RBI read as follows:
"(1) Rescheduling of payments – Term Loans and Working Capital Facilities
2. In respect of all term loans (including agricultural term loans, retail and crop loans), all commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all India Financial institutions, and NBFCs (including housing finance companies) ( lending institutions") are permitted to grant a moratorium of three months on payment of all instalments falling due between March 1, 2020 and May 31, 2020. The repayment schedule for such loans as also the residual tenor will be shifted across the board by three months after the moratorium period. Interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period."
Since, the above package announced by the Reserve Bank of India stated that interest during the moratorium period shall continue to accrue on the outstanding portion of term loans during moratorium period. There was a lot of discontentment among the citizens as the imposition of interest during the moratorium period was like giving relief on one hand and taking back by the other hand. Meanwhile, the Government of India extended the Moratorium period further by 3 months on 23rd of May, 2020. This notification also stated that interest shall continue to accrue on the outstanding portion of the term loans during the Moratorium period.
Interest on Interest – During Moratorium How Supreme Court protected the citizens?
On 30th April 2020
A writ petition came to be filed by one Aneesh Roy against the Union of India & Ors under Article 32 of the Constitution of India in the Supreme Court of India challenging the charging of interest during the moratorium period, declared by the Reserve Bank of India in consonance with the provisions of the Disaster Management Act, 2005.
The Supreme Court while dismissing the writ petition passed the following orders:
"We are not inclined to entertain these writ petitions under Article 32 of the Constitution because the petitioners are not borrowers and not being effected, in any way, by the scheme framed by the Reserve Bank of India. Hence, leaving the question of law open the writ petition is dismissed."
Thereafter, another petition came to be filed under Article 32 of the Indian Constitution by one Gajendra Sharma, in the Supreme Court because he was an affected party, who had availed the facility of taking loan from the ICICI Bank and accordingly, he sought relief from the Supreme Court stating that a Mandamus should be issued declaring the portion of impugned notification dated 27.3.2020, issued by Reserve Bank of India as Ultra Vires to the extent it allowed charging interest during the moratorium period and further facilitated the charging of interest on interest on loan amount during the moratorium period. This, as stated, had created hardship for the petitioner, since being a small borrower, the policy of the financial regulator though seemingly borrower friendly actually created hindrances and obstruction in Right to Life guaranteed under Article 21 of the Constitution, since due to the Pandemic and its resultant lockdown his business (which was his sole source of livelihood) had come to a complete standstill. The Supreme Court issued notice to the respondent in their petition. The matter thereafter, was listed before the court on several occasions, the Solicitor General appearing for Union of India sought time on various occasions to take instructions. But what is really important during this period is that both the Reserve Bank of India and Union of India in their respective counter affidavits opposed the writ petition and inter alia stated that the benefit and real intention of moratorium can't be to wave any payment obligations due on account of the borrowers. The benefit was intended to provide a brief interlude to bridge over the closure of business and its resultant financial hardship which would ease payment pressure on the aggrieved borrower. They further, argued that moratorium period permits the lending institution an option to postpone the payment that would fall due during the moratorium period. They also stated that if the moratorium is declared as interest free period, huge astronomical losses would be entailed by these banking entities since foregoing interest and penalty thereon for 6 months would bring the banking industry to its heels. The Reserve Bank of India went a step further and qualified in its affidavit that a total interest income which would have to be foregone, would be about Rs 2,01,000 crores which was estimated to be close to 1% of National GDP and this was only, an estimate for the banking system, which counting the NBFC's and All India financial institutions would in fact be much larger. Thereupon, it was argued by the petitioner that he was only confining his prayers to payment of interest on interest and was not arguing that interest should be waived absolutely. The union of India in their counter affidavit submitted that already a huge relief had been given to the individual borrowers through various concessions. Therefore, this petition deserves to be dismissed. The Indian Banking Association in their additional affidavits thoroughly opposed this petition. They also argued that the functioning of the banking primarily relates to harnessing funds from depositor's on the basis of which the bank creates credit. The Indian Banking association also argued against waiver of interest during moratorium and submitted that interest on interest is the basis for the banks carrying on their business and with the credit which is made available to them they are obliged to pay. They also argued that banks also incur expenses like staff salary etc.
The Supreme Court on 17.6.2020 while hearing the petition came to pass an important interim order which read as follows:
"We have heard learned counsel for the petitioner(s).
Learned counsel for the petitioner submits that under the disaster management Act, 2005 the central government has ample power and jurisdiction to grant relief with regard to loan which is specifically provided for. It is submitted that the circular of the Reserve Bank of India dated 27. 3. 2020 although grant moratorium substantially no relief is given to the borrowers. The two-fold submissions have been made by learned counsel for the petitioners. It is submitted that if the moratorium is being granted for a period of three months, the entire amount payable including principal and interest should not be charged during the moratorium. Secondly, at least the demand of interest on interest should not be made and these reliefs can be extended by the Central Government and the Reserve Bank of India."
Meanwhile, several other petitions came to be filed by petitioners and business cartels and representative association who also felt aggrieved by the payment of interest and penalty thereon as interest accrued on interest during the moratorium period by the banks and the financial institutions.
The Central Government during the course of the hearing considering the difficulties faced by the borrowers with an intention to mitigate the financial burden communicated to the court through an affidavit filed on 23.10.2020, that a decision was taken by the Central Government for granting various reliefs, these reliefs included a waiver of interest up to 2 crore. However, the reliefs were confined to waiver on penalty interest or interest on interest, alone. It will be important to quote the relevant portion of the scheme:
"I state and submit that as submitted in the previous affidavits, the Central Government took many policy decisions for granting various reliefs for the covered pandemic which is a 'disaster' within the meaning of the Disaster Management Act, including a policy decision whereby the following borrowers were declared eligible for the benefit of waiver of 'interest on interest':
1) MSME loans up to Rs. 2 crore
2) Education loans up to Rs. 2 crore
3) Housing loans up to Rs 2 crore
4) Consumer durable loan up to Rs. 2 crore
5) Credit card dues up to Rs. 2 crore
6) Automobile loans up to Rs. 2 crore
7) Personal loans to professionals up to Rs. 2 crore
8) Consumption loans up to Rs. 2 crore"
Since, the case of the petitioner, Shri Gajendra Sharma regarding the challenge to interest on interest is concerned was fully met, as he had taken a housing loan below Rs. 2 crore. Mr Rajiv Dutta, learned senior counsel of the petitioner candidly submitted to the Supreme Court that the petitioner was satisfied with the relief announced by the Central Government and the honourable court disposed of the writ petition filed by the petitioner accordingly.
However, writ petitions filed by several other parties representing specific sectors were directed to be listed by the court on a subsequent date and the honourable court after a full hearing vide its judgement an order dated 23.3.2021 allowed the writ petitions partially and the waiver of interest on interest was extended to other petitioners as well who had taken loans beyond Rs. 2 crore. This order was passed by the Supreme Court in the case of Small Scale Industrial Manufacturers Association Versus Union of India WP(C) No-476 etc of 2020.
While disposing of the writ petitions filed under Article 32 of the Constitution and after summing up the arguments of counsel representing those petitioners the honourable court in Para 12 of its judgement summarised the relief sought by the petitioner and it will be important to reproduce the same:
"Having heard learned counsel appearing on behalf of the respective petitioners and the reliefs sought in the respective petitions, the reliefs/submissions on behalf of the petitioners can be summarized as under
(i) a complete waiver of interest or interest on interest during the moratorium period;
(ii) there shall be sector-wise relief packages to be offered by the Union of India and/or the RBI and/or the Lenders;
(iii) moratorium to be permitted for all accounts instead of being at the discretion of the Lenders;
(iv) Extension of moratorium beyond 31.8.2020;
(v) whatever the relief packages are offered by the Central Government and/or the RBI and/or the Lenders are not sufficient looking to the impact due to Covid19 Pandemic and during the lockdown period due to Covid19 Pandemic;
vi) the last date for invocation of the resolution mechanism, namely, 31.12.2020 provided under the 6.8.2020 circular should be extended.
The honourable court after citing various judgements of the Supreme Court came to the conclusion that there is limited scope of judicial review on the policy decisions affecting the economy or it might have financial implication on the economy of the country. The honourable court noted that the relief sought by petitioner(s) are all in the realm of the policy decision not only that, if such reliefs were to be granted, it would seriously affect the banking sector and it would have far reaching financial implications on the economy of the country. The honourable court therefore rejected the prayer of the petitioner for total waiver of interest during the moratorium. The court also noted that a cautious decision was taken by the RBI to waive interest on interest during the moratorium. And the policy decision has been taken not to waive the interest during the moratorium. The policy decision has been taken to give relief to the borrowers by deferring the payment of instalment 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, therefore in this matter waiving the interest in totality is not called for.
Regarding the petitioners' submission that specific sectors should have been considered by the Reserve Bank of India for relief the honourable court has held that the petitioner in specific sectors may have suffered differently and the Kamath Committee report has been substantially accepted by the RBI in its circular dated 7.9.2020 which provided separate relief at the threshold for 26 sectors including power, real estate and construction.
Therefore, the relief to separate sectors of either waiver of interest or restructuring by way of proceeding under Article 32 of the Constitution of India can't be accepted as it amounts for a specific relief which requires examination and consideration of several financial parameters and its impact. The honourable court also noted that, in the wake of the decision taken by the Union of India, RBI the banks should be left to take decisions on their own, in this regard and also any borrowing arrangement primarily being a commercial contract and further arrangement between the lender and the borrower, called for less interference and more flexibility between the concerned parties themselves. However, RBI or the Union of India, being the appropriate authorities empowered under law, were free to provide broad guidelines for any relief.
The honourable court then referred to various sections of the Disaster Management Act, 2005 while addressing the arguments that there is no "National Plan" drawn by the Government. The sections referred to by the court were Section 6, Section 7, Section 12, Section 35, Section 36 and Section 37. Thereafter, the honourable court came to the conclusion that the Disaster Management Act 2005 is a complete code in itself and upon the conjoined reading of the aforementioned provisions, it cannot be said that functions of all the ministries are to be discharged by the National Disaster Management Authority. The honourable court also noted that under Section 13 of the National Disaster Management Act, 2005 the word used is "may" and not "shall" and the Union of India and Reserve Bank of India have taken various steps for granting relief to the disaster affected borrowers. The functions of NDMA, 2005 would be confined to section 6 of the act. The honourable court thus concluded that it cannot be said that NDMA, 2005 has not stepped in to mitigate the borrowers' plight. The affidavit on behalf of Union of India dated 31.8.2020 stated that NDMA, 2005 had interacted with the RBI. Finally, the honourable court as far as charging of penal interest/ interest/ interest on interest/ compound interest held that the policy decision of the central government not to charge interest on loans up to Rs.2 crore is concerned it was restricted to only few categories as summarised by the court in Para 31 of the judgement, the honourable court held that there is no justification to restrict the relief only up to Rs. 2 crore and that too restricted to only a few categories, it was noted by the court that there is no rationale to restrict the relief up to Rs. 2 Crore and that too for few categories. The honourable court also noted that the scheme dated 23.10.2020 contained an eligible criteria and provided that a borrower whose aggregate of all facilities with lending institutions is more than Rs. 2 crore would not be eligible for ex gratia payment. The court noted that even otherwise compound interest/interest on interest is chargeable on deliberate/wilful default by the borrower to pay the instalment due and payable. Because by notification dated 27.3.2020 Government itself provided the deferment of payment due and payable therefore, it cannot be said that non-payment of instalment during the moratorium period is wilful. The court therefore, held that there shall not be any charge of interest on interest/compound interest from any borrower and any amount recovered on this count shall be refunded/adjusted/given credit in the next instalment of the loan amount.
The honourable court also made it clear that the RBI circular dated 27.3.2020 shall be applicable to all banks, non-banking financial companies, housing finance companies and other financial institutions compulsorily and mandatorily.
Thus, the saga of exploitation of borrowers who were being asked to pay penal interest/compound interest even when they had been granted a moratorium for six months from payment of their EMI instalments came to an end. If the court had not intervened and granted this relief, it is difficult to imagine how much the banks would have benefited from the borrowers and made unjust enrichment at the cost of poor borrowers.
In hindsight as Shakespeare would have said a pound of flesh is just that not a drop of blood ought to be spilled in its recovery.