Supreme Court Rules on Interest on Loans During Moratorium: Small Scale Industrial Manufactures Association vs. Union of India (23 March 2021)

Case Background

The case originated from a writ petition filed by the Small Scale Industrial Manufactures Association, Haryana, seeking relief from the financial strain caused by the COVID-19 pandemic. The association challenged the Reserve Bank of India’s (RBI) notification dated 27.03.2020, arguing that it did not provide adequate relief to industries, particularly MSMEs.

Several other writ petitions were also filed by various organizations and individuals, including CREDAI (Confederation of Real Estate Developers’ Associations of India), Contract Carriage Operators Association, and individual borrowers. These petitions raised similar grievances, primarily questioning the charging of interest on loans during the moratorium period. The petitioners sought a complete waiver of interest, extension of the moratorium, and sector-specific relief packages.

Timeline

Legal Framework

The Supreme Court considered the following key legal provisions:

• Disaster Management Act, 2005: The court examined the provisions of this Act, particularly Sections 2(d), 2(e), 2(i), 2(p), 11, 12 and 13, to determine whether the COVID-19 pandemic qualifies as a disaster and what measures should be taken for disaster management.
  • Section 2(d) defines “disaster”.
  • Section 2(e) defines “disaster management”.
  • Section 2(i) defines “mitigation”.
  • Section 2(p) defines “resources”.
  • Section 11 mandates a plan for disaster management.
  • Section 12 imposes a duty on the National Authority to recommend guidelines for minimum standards of relief.
  • Section 13 mandates the National Authority to recommend relief in repayment of loans.
• Banking Regulation Act, 1949: The court referred to Sections 21 and 35A of this Act, which empowers the RBI to issue directions to banking companies.
  • Section 21 empowers RBI to determine the policy in relation to advances.
  • Section 35A empowers RBI to issue directions to banking companies.

Arguments

The petitioners, led by Senior Advocate Ravindra Shrivastava, argued that:

• The COVID-19 pandemic is a disaster requiring comprehensive management under the Disaster Management Act, 2005.
• The RBI’s measures were inadequate and did not provide substantial relief to MSMEs.
• The National Disaster Management Authority (NDMA) failed to recommend adequate relief measures under Sections 12 and 13 of the Disaster Management Act, 2005.
• The classification of borrowers for the ex-gratia scheme was arbitrary and discriminatory.
• Charging interest on interest during the moratorium period was akin to penal interest and was unjustified.

The respondents, represented by Solicitor General Tushar Mehta and Senior Advocates Harish Salve and V. Giri, countered that:

• The government and RBI had taken several measures to mitigate the financial stress caused by the pandemic.
• The RBI’s circulars provided a moratorium on loan repayments, not a waiver of interest.
• A complete waiver of interest would have serious implications for the financial stability of banks.
• The NDMA had taken cognizance of the situation and made recommendations to the RBI.
• The RBI’s resolution framework provided a way for lenders to restructure loans and offer concessions to borrowers.
• The classification of borrowers was a policy decision based on various financial considerations.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether there should be a complete waiver of interest or interest on interest during the moratorium period.
2. Whether there should be sector-wise relief packages.
3. Whether the moratorium should be permitted for all accounts instead of being at the discretion of the lenders.
4. Whether the moratorium period should be extended beyond 31.08.2020.
5. Whether the last date for invocation of the resolution mechanism, namely 31.12.2020, should be extended.

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court’s judgment addressed the various submissions made by the parties. The court’s treatment of each submission is summarized below:

The court also considered the authorities presented by the parties. The following authorities were viewed by the court:

• Charan Lal Sahu v. Union of India, (1990) 1 SCC 613: The court discussed the doctrine of parens patriae, noting that the government must act for the welfare of its people.
• Union Carbide Corporation Limited v. Union of India, (1991) 4 SCC 584: The court referred to this case to emphasize the government’s duty to provide relief.
• Kailash Chand Sharma v. State of Rajasthan, (2002) 6 SCC 562 and M. Nagaraj v. Union of India, (2006) 8 SCC 212: The court cited these cases to highlight the importance of empirical studies in policy decisions.
• Rattan Arya v. State of T.N. (1986) 3 SCC 385, State of W.B. v. Anwar Ali Sarkar 1952 SCR 284: AIR 1952 SC 75, and D.S. Nakara v. Union of India, (1983) 1 SCC 305: The court referred to these cases to discuss the principles against arbitrariness in classification.
• Roop Chandra Adlakha v. Delhi Development Authority, 1989 Supp. (1) SCC 116: The court cited this case to discuss the principle that unequals should not be treated as equals.
• T.N. Godavarman Thirumulkpad v. Union of India (1997) 2 SCC 267: The court cited this case to emphasize the need for continuous monitoring of statutory and executive actions.
• Pradip Kumar Maity v. Chinmoy Kumar Bhunia (2013) 11 SCC 122, Chinnamarkathian v. Ayyavoo (1982) 1 SCC 159, Official Liquidator v. Dharti Dhan (P) Ltd. (1977) 2 SCC 166, Bachahan Devi v. Nagar Nigam, Gorakhpur (2008) 12 SCC 372, Delhi Administration v. Umrao Singh (2012) 1 SCC 194, and Union of India v. Kumho Petrochemicals Co. Ltd. (2017) 8 SCC 307: These cases were used to interpret the word “may” in Section 13 of the Disaster Management Act, 2005.
• Arun Kumar Agrawal v. Union of India (2013) 7 SCC 1: The court discussed the limited scope of judicial review in economic policy matters.
• Metropolis Theatre Co. v. Chicago, 57 L Ed 730: 228 US 61 (1913): The court cited this US Supreme Court case to emphasize that government decisions may involve rough accommodations.
• Peerless General Finance and Investment Co. Ltd. v. RBI, (1992) 2 SCC 343: The court discussed the limited role of courts in economic policy matters.
• Federation of Railway Officers Association v. Union of India (2003) 4 SCC 289: The court referred to this case to emphasize that courts should not interfere in matters requiring technical expertise.
• Dhampur Sugar (Kashipur) Ltd. v. State of Uttaranchal, (2007) 8 SCC 418: The court discussed the limitations of courts in dealing with policy matters.
• State of M.P. v. Nandlal Jaiswal, (1986) 4 SCC 566, BALCO Employees’ Union (Regd.) v. Union of India, (2002) 2 SCC 333, Dalmia Cement (Bharat) Ltd. v. Union of India (1996) 10 SCC 104, Villianur Iyarkkai Padukappu Maiyam v., Union of India (2009) 7 SCC 561, Narmada Bachao Andolan v. Union of India, (2000) 10 SCC 664, and R.K. Garg v. Union of India (1981) 4 SCC 675: These cases were used to discuss the principles of judicial review in policy matters.
• Shri Sitaram Sugar Co. Ltd. V. Union of India (1990) 3 SCC 223, Prag Ice & Oil Mills v. Union of India AIR 1978 SC 1296, and P.T.R Exports (Madras) P. Ltd. V. Union of India (1996) 5 SCC 268: These cases were used to discuss courts not interfering in economic policy.

What weighed in the mind of the Court?

The Supreme Court’s decision was influenced by a careful balancing of various factors:

• The need to provide relief to borrowers affected by the pandemic.
• The importance of maintaining the financial stability of banks.
• The limitations on the court’s power to interfere in economic policy decisions.
• The need to ensure that any relief measures are fair and non-discriminatory.
• The interpretation of the word “may” in Section 13 of the Disaster Management Act, 2005.

Judgment

The Supreme Court partly allowed the petitions, directing that:

• No interest on interest/compound interest/penal interest shall be charged for the period during the moratorium.
• Any amount recovered as interest on interest/compound interest/penal interest for the moratorium period shall be refunded or adjusted in the next installment.

The court dismissed all other prayers, including the request for a complete waiver of interest, extension of the moratorium, sector-specific relief packages, and extension of the invocation date for the resolution mechanism.

The court emphasized that its role was not to interfere with economic policy decisions unless they were arbitrary or violated fundamental rights.

The court quoted from the judgment:

“The function of the Court is to see that lawful authority is not abused but not to appropriate to itself the task entrusted to that authority.”

“Courts are not to interfere with economic policy which is the function of experts.”

“The court can only strike down some or entire directions issued by the RBI in case the court is satisfied that the directions were wholly unreasonable or violative of any provisions of the Constitution or any statute.”

Key Takeaways

• Borrowers are not liable to pay interest on interest/compound interest/penal interest for the moratorium period.
• Lenders are required to refund any such interest already recovered or adjust it against future payments.
• The Supreme Court will not interfere with economic policy decisions unless they are arbitrary or violate fundamental rights.
• The Disaster Management Act, 2005 provides a framework for disaster management, but the implementation of relief measures is primarily the responsibility of the executive branch.
• The RBI’s circulars and the government’s relief packages were considered sufficient to address the financial stress caused by the pandemic.

Directions

The Supreme Court directed that:

• No interest on interest/compound interest/penal interest shall be charged for the period during the moratorium.
• Any amount recovered as interest on interest/compound interest/penal interest for the moratorium period shall be refunded to the concerned borrowers and to be given credit/adjusted in the next installment of the loan account.

Development of Law

The ratio decidendi of this case is that while the government and the RBI have the authority to frame economic policies during a crisis, they must ensure that such policies are fair, non-discriminatory, and do not violate fundamental rights. The judgment also clarifies that charging interest on interest during a moratorium is not justified, as it is akin to penal interest for a non-willful default. This ruling provides a significant relief to borrowers affected by the pandemic. The Supreme Court upheld the policy decisions of the government and RBI, but provided relief against the charging of interest on interest during the moratorium period.

Conclusion

In conclusion, the Supreme Court’s judgment in Small Scale Industrial Manufactures Association vs. Union of India provides important clarifications on the extent of relief measures during the COVID-19 pandemic. While the court upheld the government’s policy decisions and the RBI’s circulars, it provided significant relief to borrowers by ruling against the charging of interest on interest during the moratorium period. The decision highlights the importance of balancing economic stability with the need to protect the interests of borrowers during times of crisis.