Loan moratorium: Lenders to credit ‘interest on interest’ to borrowers by Nov 5, Centre tells SC

The Centre has informed the Supreme Court that lenders have been directed to credit in the accounts of eligible borrowers by November 5 the difference between compound interest and simple interest collected on loans of up to Rs 2 crore during the RBI’s loan moratorium scheme.

The Ministry of Finance has said that after crediting this amount, the lending institutions would claim reimbursement from the Central government.

Also read: Centre’s compound interest waiver: What borrowers need to know about the scheme

In an affidavit filed in the apex court, the government has said that the ministry has issued a scheme as per which lending institutions would credit this amount in the accounts of borrowers for the 6-month loan moratorium period which was announced following the COVID-19 pandemic situation.

Under the scheme, all lending institutions (as defined under clause 3 of the scheme) shall credit the difference between compound interest and simple interest in the respective accounts of eligible borrowers for the period between March 1, 2020 to August 31, 2020, the affidavit said.

It said: The Central government has directed that all lending institutions described in clause 3 thereof shall give effect to the scheme and credit the amount calculated as per the scheme in the respective accounts of borrowers by November 5, 2020.

The affidavit was filed in the top court which is hearing a batch of pleas which have raised issues, including that of ‘interest on interest’, concerning the loan moratorium period.

The affidavit said the amount shall be credited by lending institutions irrespective of whether such eligible borrowers have fully availed or partially availed or have not availed of the moratorium viz. deferment in payment of instalments as per the circulars dated March 27, 2020 and May 23, 2020 issued by RBI.

After crediting the said amount in the respective accounts of eligible borrowers, the lending institutions would claim reimbursement from the Central government through the nodal agency of State Bank of India as stipulated under the scheme, it said.

It said the decision has been taken after careful consideration, keeping in mind the overall economic scenario, the nature of borrowers, impact on the economy and such other factors as a policy decision earmarking the above referred class of borrowers for grant of benefits .

On October 14, the apex court had observed that the Centre should implement “as soon as possible” the interest waiver on loans of up to Rs 2 crore under the RBI’s moratorium scheme and had said that the common man’s Diwali is in the government’s hands.

The Centre had earlier told the court that going any further than the fiscal policy decisions already taken, such as waiver of compound interest charged on loans of up to Rs 2 crore for moratorium period, may be “detrimental” to the overall economic scenario, the national economy and banks may not take “inevitable financial constraints“.

The Reserve Bank of India (RBI) had also filed an affidavit in the apex court saying that loan moratorium exceeding six months might result in vitiating the overall credit discipline , which will have a debilitating impact on the process of credit creation in the economy.

Initially, the RBI on March 27 had issued the circular which allowed lending institutions to grant a moratorium on payment of instalments of term loans falling due between March 1, 2020, and May 31,2020, due to the pandemic.

Later, the period of the moratorium was extended till August 31 this year.