Supreme Court Relieves Borrowers: No Compound Interest During Moratorium Period (27 November 2020)

Date of the Judgment: 27 November 2020
Citation: Not Available
Judges: Ashok Bhushan, J., R. Subhash Reddy, J., and M.R. Shah, J.

Can the government charge interest on loans when a nationwide lockdown has restricted people’s ability to earn a livelihood? The Supreme Court of India addressed this critical question in the context of the COVID-19 pandemic, which led to a nationwide lockdown and financial distress for many. The core issue revolved around the Reserve Bank of India’s (RBI) notification allowing a moratorium on loan repayments but continuing to accrue interest on outstanding loan amounts. This judgment examines the validity of charging interest during the moratorium period. The bench comprised Justices Ashok Bhushan, R. Subhash Reddy, and M.R. Shah, with the judgment authored by Justice Ashok Bhushan.

Case Background

The petitioner, Gajendra Sharma, had availed a home loan of Rs. 37,48,000 from ICICI Bank. Following the declaration of COVID-19 as a pandemic, the National Disaster Management Authority, acting under Section 6 of the Disaster Management Act, 2005, issued directives for social distancing to curb the spread of the virus. The Reserve Bank of India (RBI), on March 27, 2020, issued a notification allowing a three-month moratorium on loan repayments, effective from March 1, 2020, to May 31, 2020. However, this notification stipulated that interest would continue to accrue on the outstanding loan amounts during the moratorium period. The petitioner argued that this imposition of interest during the moratorium period was unjust, especially given the nationwide lockdown, which severely impacted livelihoods.

The petitioner contended that the imposition of interest during the moratorium period was a violation of the right to life under Article 21 of the Constitution of India. The petitioner also highlighted that the additional interest burden was being divided across future EMIs, thereby increasing the monthly financial burden on the borrower. The initial three-week lockdown was further extended, and the RBI, on May 23, 2020, extended the moratorium by another three months, from June 1, 2020, to August 31, 2020, but maintained the condition of accruing interest. The petitioner sought a writ of mandamus to declare the portion of the RBI notification charging interest during the moratorium period as ultra vires and to direct the respondents to provide relief by not charging interest during the moratorium.

Timeline:

Course of Proceedings

The Supreme Court issued notices on the writ petition. During the hearing on June 17, 2020, the petitioner argued that the Central Government had the power under the Disaster Management Act, 2005, to grant relief regarding loans. The petitioner also argued that the RBI circular, while granting a moratorium, did not provide substantial relief to borrowers. The petitioner made two key submissions: first, that no interest should be charged during the moratorium period, and second, that interest on interest should not be charged. The Union of India and the Reserve Bank of India filed affidavits detailing the measures taken to mitigate financial suffering due to the COVID-19 pandemic. The Union of India stated that it had interacted with the RBI to provide relief to borrowers, and the RBI had issued circulars to facilitate the revival of real sector activities.

The matter was heard along with other related writ petitions on different dates. On November 19, 2020, the petitioner’s counsel expressed satisfaction with the measures taken by the Government of India, particularly the decision to forego interest on eight specified categories of loans up to Rs. 2 Crores. Consequently, the court proceeded to decide the writ petition.

Legal Framework

The legal framework of this case primarily involves the Disaster Management Act, 2005, and the notifications issued by the Reserve Bank of India (RBI).

The Disaster Management Act, 2005, empowers the National Disaster Management Authority to take measures to mitigate disasters. Section 6 of the Disaster Management Act, 2005, was invoked to address the COVID-19 pandemic. The relevant part of the notification dated March 27, 2020, issued by the Reserve Bank of India is as follows:

“(i) 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.”

The notification allowed a moratorium on loan repayments but stipulated that interest would continue to accrue during this period. The RBI further extended the moratorium by another three months through a notification dated May 23, 2020, with the same condition regarding interest accrual. The petitioner argued that this imposition of interest during the moratorium period violated Article 21 of the Constitution, which guarantees the right to life.

Arguments

Petitioner’s Arguments:

• The petitioner argued that the imposition of interest during the moratorium period was ultra vires and defeated the purpose of granting a moratorium.
• It was contended that when all means of livelihood were curtailed due to the lockdown, charging interest during the moratorium period was a violation of the right to life under Article 21 of the Constitution of India.
• The petitioner submitted that the additional interest burden would increase the monthly EMI, causing further financial hardship.
• The petitioner argued that the notification regarding interest payment during the moratorium period violated the principles of natural justice, as the government had restricted work while simultaneously demanding loan interest.
• The petitioner sought a writ of mandamus to declare the interest charge during the moratorium period as ultra vires and to direct the respondents to provide relief by not charging interest.

Respondents’ Arguments (Union of India and Reserve Bank of India):

• The Union of India stated that it was fully aware of the difficulties faced by various sectors and had taken several measures to provide relief, including interacting with the RBI to formulate relief measures for borrowers.
• The Union of India detailed various measures taken to mitigate financial suffering, including the decision to waive interest on interest for eight specified categories of loans up to Rs. 2 Crores.
• The Reserve Bank of India stated that it had taken follow-up actions based on the policy decisions of the Finance Ministry and had issued circulars to all commercial banks to be guided by the government’s scheme.
• The respondents highlighted that the government had approved a scheme to credit the difference between compound and simple interest to eligible borrowers for the period between March 1, 2020, and August 31, 2020.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section of the judgment. However, the core issue addressed by the court was:

1. Whether the imposition of interest during the moratorium period, as per the RBI notifications, was justified, especially considering the hardships faced by borrowers due to the COVID-19 pandemic and the ensuing lockdown.

Treatment of the Issue by the Court

The following table demonstrates how the Court dealt with the issue:

Authorities

The Supreme Court did not explicitly cite any cases or books in its judgment. The authorities considered were primarily the notifications and circulars issued by the Reserve Bank of India and the Government of India.

Judgment

The Supreme Court disposed of the writ petition, noting that the petitioner had expressed satisfaction with the measures taken by the Government of India. The Court directed the respondents to ensure that all steps were taken to implement the government’s decision dated October 23, 2020, which provided for the waiver of interest on interest for specified loan categories up to Rs. 2 Crores. This decision effectively addressed the core grievance of the petitioner, who had challenged the imposition of interest during the moratorium period.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The RBI notifications of March 27, 2020, and May 23, 2020, were acknowledged as the basis for the moratorium but were effectively superseded by the government’s relief measures.
• The Government of India’s order of October 23, 2020, was the basis for the Court’s directions, as it provided the scheme for waiving interest on interest.
• The RBI circular of October 26, 2020, was seen as a follow-up action to implement the government’s policy decision.

What weighed in the mind of the Court?

The Supreme Court was primarily influenced by the measures taken by the Government of India to mitigate the financial hardships faced by borrowers due to the COVID-19 pandemic. The Court noted the government’s decision to waive interest on interest for specified loan categories up to Rs. 2 crores, which directly addressed the petitioner’s grievance. The Court’s decision was also influenced by the fact that the petitioner had expressed satisfaction with the government’s measures, indicating that the core concerns had been resolved. The Court emphasized the need for the government’s decision to be effectively implemented to provide the intended relief to the borrowers.

Fact:Law Ratio

Logical Reasoning:

The Court did not discuss any alternative interpretations or reject any specific legal points. The decision was primarily based on the government’s policy decision to provide relief to borrowers. The Court’s reasoning was straightforward: the government had taken measures to address the issue raised by the petitioner, and therefore, the Court directed the implementation of those measures.

The Supreme Court’s decision was based on the following key reasons:

• The government had taken specific measures to address the grievances of the petitioner by waiving interest on interest for specified loan categories.
• The petitioner had expressed satisfaction with the government’s measures, indicating that the core issue had been resolved.
• The Court’s role was to ensure that the government’s decision was effectively implemented to provide relief to the intended beneficiaries.

The judgment did not include any dissenting opinions. The decision was unanimous.

The decision has significant implications for future cases involving similar financial distress situations, as it highlights the government’s responsibility to address the economic impact of disasters. It also sets a precedent for providing relief to borrowers during extraordinary circumstances.

Key Takeaways

• The Supreme Court directed the implementation of the government’s decision to waive interest on interest for specified loan categories up to Rs. 2 crores during the COVID-19 moratorium period.
• This decision provides significant relief to borrowers who had availed loans in the specified categories.
• The judgment highlights the government’s role in mitigating the financial impact of disasters and providing relief to affected individuals.
• The case sets a precedent for addressing similar financial distress situations in the future.

Directions

The Supreme Court directed the respondents to ensure that all steps are taken to implement the decision dated 23.10.2020 of the Government of India, Ministry of Finance, so that the benefits as contemplated by the Government of India reach those for whom the financial benefits have been envisaged and extended.

Development of Law

The ratio decidendi of this case is that during a national disaster, the government has a responsibility to mitigate the financial hardships faced by citizens. The government’s decision to waive interest on interest during the moratorium period was upheld, providing relief to borrowers and setting a precedent for similar situations in the future. This case does not explicitly overrule any previous position of law but rather reinforces the government’s role in providing financial relief during crises.

Conclusion

The Supreme Court’s decision in Gajendra Sharma vs. Union of India and Anr. provided relief to borrowers by directing the implementation of the government’s scheme to waive interest on interest for specified loan categories up to Rs. 2 crores during the COVID-19 moratorium period. The Court’s decision underscores the importance of government intervention in mitigating financial distress during national disasters and sets a precedent for future cases involving similar circumstances.

Category:

Parent Category: Disaster Management Act, 2005

Child Category: COVID-19 Pandemic

Child Category: Moratorium on Loans

Child Category: Interest Waiver

Parent Category: Financial Law

Child Category: Loan Moratorium

Child Category: Reserve Bank of India Notifications

Child Category: Government Relief Measures

Parent Category: Constitution of India

Child Category: Article 21, Constitution of India

FAQ

Q: What was the main issue in the Gajendra Sharma vs. Union of India case?

A: The main issue was whether interest should be charged on loan amounts during the moratorium period declared due to the COVID-19 pandemic.

Q: What was the Supreme Court’s decision?

A: The Supreme Court directed the implementation of the government’s decision to waive interest on interest for specified loan categories up to Rs. 2 crores during the moratorium period.

Q: What is a loan moratorium?

A: A loan moratorium is a temporary suspension of loan repayments. During a moratorium, borrowers are not required to make payments for a specified period.

Q: What does “waiver of interest on interest” mean?

A: It means that the government will not charge interest on the interest that has accrued on loans during the moratorium period. Borrowers will only need to pay the simple interest.

Q: Which loans were eligible for the interest waiver?

A: The interest waiver applied to MSME loans, education loans, housing loans, consumer durable loans, credit card dues, automobile loans, personal loans to professionals, and consumption loans up to Rs. 2 crores.

Q: What was the role of the Reserve Bank of India (RBI) in this case?

A: The RBI issued notifications allowing the moratorium but initially stipulated that interest would continue to accrue. Later, the RBI issued circulars to implement the government’s relief measures.

Q: What is the significance of this judgment?

A: This judgment highlights the government’s responsibility to mitigate financial hardships during national disasters and sets a precedent for providing relief to borrowers in similar situations.

Q: How does this affect me if I had a loan during the moratorium period?

A: If you had a loan in one of the specified categories up to Rs. 2 crores, you should have received a credit for the difference between compound and simple interest for the moratorium period. Check with your lender to ensure this has been applied.