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SC: Rethink ‘interest on interest’ for loans

June 18, 2020 06:00 AM


SC: Rethink ‘interest on interest’ for loans
LOAN MORATORIUM: People are not opting for the relief as they don’t see any benefit in the scheme, court tells govt, RBI

We see no merit in charging interest on interest, the bench said. PTI
Abraham Thomas

New Delhi : There is “no merit in charging interest on interest” for deferred loan payment installments during the moratorium period announced in wake of the Covid-19 pandemic, Supreme Court judges said on Wednesday, asking Centre to discuss with the Reserve Bank of India (RBI) on making the loan repayment embargo more beneficial.

The observations came on a petition seeking relief from compounding interest that people who opt for a moratorium will be subjected to, and the court adjourned the matter till August. “Once the moratorium is fixed then it should serve the desired purposes and we see no merit in charging interest on interest,” said the bench comprising justices Ashok Bhushan, SK Kaul and MR Shah.

“Why do you (Centre) think that people are not accepting moratorium (on loan repayment)? Because they do not see any benefit in it. The Centre and RBI cannot throw up their hands now saying this is something between banks and public at large,” said the judges. The remark was prompted by a submission made by Solicitor General Tushar Mehta who informed the court that after a meeting between finance ministry and RBI, it emerged that the Centre could do little since the loan agreement is a contract between the bank and the borrower.

“We are saying you may charge interest on the principal amount but not on the interest that is getting deferred,” the judges said.

Mehta agreed to convey the concerns of the court to the government and have a relook on the possible solution before the next date of hearing.

The solicitor general told the apex court that waiving the interest completely will not be easy for banks as they have to pay interest to their depositors.

“There are 133 lakh crore rupees in deposits with banks and interest has to be paid on them and the waiver will have a cascading effect,” Mehta told the bench.

The Court’s observations came during the hearing on a petition filed by an Agra resident Gajendra Sharma who challenged RBI’s March 27 and May 22 notifications announcing moratorium on loan while permitting banks to levy interest. Under the scheme, the three month moratorium on EMIs from March-May was further extended till August 31. Indian Banks Association represented by senior advocate Harish Salve that the petition is premature. “We Court directed all parties to file their affidavits and relevant documents by the next date. He suggested the Court to hold on till August by when banks can assess sector-wise distress

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