New Delhi, March 23: The Supreme Court has ordered a waiver of compound interest for all borrowers that availed a loan moratorium last year under the central bank’s Covid-related relief measures.

The top court did not find any rationale for extending the waiver of compound interest or interest on interest only for loans up to Rs 2 crore, it said in a judgment delivered Tuesday, BloombergQuint reported. 

During the hearing of the case, the central government had agreed to absorb the cost of interest on interest for small ticket loans of up to Rs 2 crore each across eight categories of borrowers. The total cost borne by the government then was estimated to be Rs 6,500 crore. 

Now the top court has said compound interest for all borrowers availing a moratorium, irrespective of loan amount or category, is to be waived and has ordered that the amounts already recovered as interest on interest for the moratorium period must be adjusted by the banks. 

Credit rating agency ICRA estimates the extended waiver will cost an additional Rs 7,000 – 7,500 crore, according to BloombergQuint.

The apex court declined other pleas in the case, including a complete waiver of all interest, an extension of the period of loan moratorium, as well as to direct the Reserve Bank of India and the government to provide further relief as well as some specific sector-wise relief.

The court issued these directions while verbally pronouncing the order. The written order has yet to be uploaded to the Supreme Court website. Hence, it is unclear yet whether the Supreme Court has lifted the six-month long freeze on declaration of non performing assets on account of loan default during the pandemic period.

Case background

In 2020, the RBI had permitted banks to grant a moratorium on term loans to help soften the economic blow of the pandemic. The moratorium, which was initially for a period of three months till May 31, was later extended till August 31.

The case in the Supreme Court started with a public interest litigation by Gajendra Sharma, a borrower seeking relief on interest payable during the moratorium period. The discussion on the scope of the relief in the top court was gradually restricted to a waiver of the compound interest (interest on interest) portion applicable during the moratorium.

It was during the course of these hearings, the Supreme Court in September passed an interim order saying that accounts which were not non-performing as on August 31 would not be declared NPA till further orders.

In October 2020, the government told the top court that it had decided to waive the compound interest for loans up to Rs 2 crore for eight categories of borrowers, mostly retail and small businesses. Covid-hit sectors such as power, hotels and sought further specific relief from the court.

The RBI, however, informed the court that banks would decide on such relief via loan restructuring under a special Covid-dispensation. That restructuring window closed On December 31.

Yet, the stay on declaring loan account non-performing remained in force. But banks have disclosed proforma numbers for quarters ended September and December 2020, keeping investors informed about the stress on balance sheets.

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