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SC Bars 'compound, Penal Interests' On Loans Drawn During Moratorium Period Of 2020

'Penal or compound interests already collected from borrowers who took loan during Covid-19 phase of the moratorium period must be refunded', the bench ruled

PTI/ Representational Image

Referring to the circular of RBI on March 27 last year that instructed lending firms to grant a moratorium on loan repayments due to the Covid-19 pandemic, a Supreme court bench of three judges on Tuesday said that the "waiver of complete interest over the principal amount taken as loan" will not be possible; however, it said that "the compound and penal interests applied on loans during the moratorium period will not be taken" from borrowers. The moratorium was initially announced by RBI for repayments between March 1 and May 21, 2020 — and it was further extended for three months until August 31.

'Interest already collected on principal amount must be refunded'

The Apex court observed a waiver of the complete interest amount will affect the depositors and will negatively impact the economy. However, the bench headed by Justice Ashok Bhushan said that those who took loans between March and August last year will not have to pay the compound or penal interest and that they can repay the initial amount that they had borrowed as a loan.
 
The bench further ruled that in case the lending institutions have already collected interest from borrowers in form of penal or compound interest, "it should be either refunded to the borrower or adjusted towards the next installments." The bench also noted that last year the Centre had announced waiver of "interest on interest" in eight specified categories for borrowers who took loans up to Rs 2 crore, and ruled that "There is no justification produced to restrict the relief of not charging interest on interest in the context of the loans up to Rs 2 crore only and that too restricted to the aforesaid categories," the bench observed.

'Judicial review in economic matters to be dealt by the Centre and RBI'

The bench further said that the scope of judicial review in economic matters is very limited, as "the judges are not experts." And it said that "Courts cannot intervene in such matters. The Centre with the advice of expert bodies like the Reserve Bank of India will provide financial packages and reliefs as decided by the government," the SC ruled Tuesday.
 
The bench comprising justices Ashok Bhushan, R Subhash Reddy, and MR Shah observed the petitions filed by borrowers from Small Scale Industrial Manufacturers Association (Regd) in loans that were taken for education, personal, housing, loans for micro among others. 

(Credit: PTI/Representational Image)

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