SC ordinance on waiver of interest

Public sector banks may have to bear a burden of Rs 1800-2000 crore due to a recent Supreme Court ruling on waiving compound interest on all loan accounts that opted for a moratorium in March-August 2020 , sources said.

The judgment covers loans over Rs 2 crore, as loans below that amount received general interest on the interest waiver in November of last year. The compound interest support scheme for the loan moratorium cost the government Rs.5,500 crore in 2020-2021 and the scheme has covered all borrowers, including the rapid who did not take advantage of the moratorium.

According to banking sources, initially 60% of borrowers took advantage of the moratorium and gradually the percentage fell to 40% and even less as collection improved with ease during foreclosure. In the case of enterprises, this percentage was only 25 per cent for public sector banks.

They added that the banks would offer a compound interest waiver for the period the borrower was availing of the moratorium. For example, if a borrower took advantage of a three-month moratorium, the waiver would apply to that period.

On March 27 of last year, the RBI announced a moratorium on the payment of term loan installments maturing between March 1 and May 31, 2020, due to the pandemic, which was then extended until to August 31.

The Supreme Court’s order this time around is only limited to those who took advantage of the moratorium, so the public sector bank’s liability is expected to be less than Rs 2,000 crore based on rough calculations, sources added.

In addition, they said, the ordinance does not specify a timeframe for the settlement of compound interest unlike last time, so banks can design an adjustment or structured settlement mechanism.

Meanwhile, the Association of Indian Banks (IBA) wrote to the government to compensate the lenders for the interest on the interest waiver.

The government would take an appeal based on various considerations.

Last month, the Supreme Court ordered that no compound or criminal interest be charged to borrowers for the six-month loan moratorium period, which was announced last year amid the COVID-19 pandemic, and the amount already invoiced will be refunded, credited or adjusted. .

The Supreme Court refused to interfere with the Central and Reserve Bank of India (RBI) decision not to extend the moratorium on lending beyond August 31 last year, saying it it was a political decision. Rejecting the requests for a complete waiver of interest, the court ruled that such a decision would have consequences for the economy. The bench also said the waiver of interest would affect depositors. At the same time, the court also rejected the requests for redress in this matter.

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