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SC strikes down charging Penal Interest during Loan Moratorium & rejects Moratorium period Extension

It is directed that there shall not be any charge of interest on interest/compound interest/penal interest for the period during the moratorium and any amount already recovered under the same head, namely, interest on interest/penal interest/compound interest shall be refunded to the concerned borrowers and to be given credit/adjusted in the next instalment of the loan account (Para.32).


[Writ Petition (C.) No. 476 of 2020]

Decided on March 23, 2021

This case was decided by a bench of the Supreme Court consisting of Justice Ashok Bhushan, Justice R Subhash Reddy and Justice MR Shah.

The petitioners in this case filed a writ petition under Article 32 of the Indian Constitution. The reliefs sought by the petitioners can be summarized as under:

i. A complete waiver of compound interest during the moratorium period.

ii. Sector-wise relief packages

iii. Moratorium period to be permitted for all accounts, not at the discretion of the Lenders

iv. Extension of moratorium

v. More relief packages offered by the Central Government

vi. Extension of last date for invocation of the resolution mechanism

RBI had released a notification, Covid-19 Regulatory Package, wherein the moratorium period for loan was extended to 31.08.2020. The main issue with this notification was that it charged interest on the outstanding portion of the term loans during the moratorium period.

Shri Ravindra Shrivastava, learned Senior Advocate for certain petitioners submitted that the scope of the relief is only on compound interest. This limits the amounts of beneficiaries. Also, steps for disaster management have not been undertaken by the statutory authorities under the Disaster Management Act, 2005 (DMA), and pleaded for issuance of mandamus.

Section 11 of the DMA mandates for a national plan, which hasn’t been done yet. Section 12 mandates the National Authority to recommend guidelines for reliefto persons affected by disaster. Section 13 enjoins the National Authority upon the duty to recommend relief in repayment of loans or grant of fresh loans.

The Counsel submitted that the National Authority has not made any recommendations with regard to such relief. He understood that the entire executive government at Centre and State levels, comes under the command of the National Authority, which is an expert body.

According to the doctrine of Parens Patriae, the government must act only for the welfare of the people. This was emphasized in Charan Lal Sahu V. UOI. In Union Carbide Corporation Limited V. UOI, it was stated that the government is bound to arrange its coffers in a manner that relief cannot be denied.

While there were no recommendations issued by the NDMA, it submitted an affidavit to the UOI, stating that borrowers may require further relief, and the RBI should consider the same. The Finance Ministry communicated the same to the RBI, but no further consideration was made.

The waiver of compound interest was granted by way of the Ex-Gratia Scheme. The word ‘ex-gratia’ was opposed.Persons affected by the disaster are entitled to relief, and it is not bounty or charity.

The eligibility criteria in the Scheme are restrictive and arbitrary. The categorization of borrowers has been done without any collection of data or empirical study. It stands in violation of Article 14. Relying on the case of Rattan Arya V. State of TN, etc., the Counsel pleaded that the Union cannot disguise an evidently discriminatory and arbitrary decision under a protective shield of policy decision.

It was also contended that the interest is a penal interest, which can be charged only in case of willful default. The Counsel also reiterated the role of the Court in ensuring that authorities remain vigilant, by issuing a mandamus.

Dr. Abhishek Manu Singhvi, learned senior advocate for the power sector, pleaded for a relief package for the power sector. He also submitted that the RBI ought to have made it mandatory for all lenders to provide relief, instead of leaving it to their discretion.

Shri Kapil Sibbal, learned Senior Advocate, pleaded for sector-specific reliefs to the Real Estate Sector. He also supported arguments that the duties under Section 12 and 13 of DMA, were not performed by the NDMA.

Shri Tushar Mehta, learned Solicitor General of India, on behalf of UOI, emphasized that, to mitigate the burden of debt-servicing, RBI came out with a relief package, permitting lending institutions to grant moratorium on term loans. He also highlighted the various schemes by the Finance Ministry and the Centre, keeping in mind the financial stability of the economy, and the impossibilityto have a unitary solution for all.

Relief measures have to be taken keeping in mind several administrative and financial considerations. During the moratorium period, the bank does not get its funds back, while it continues to incur costs on its deposits and borrowings. The Government has to conserve finances for other uses, such as public health. Business and lending institutions need to survive. If financial resources are spent mindlessly, it will lead to economic ruin.

The Counsel, in this regard, highlighted that various schemes have already been launched by the government to mitigate the losses, such as the Garib Kalyan Package and the AatmaNirbhar Package.

Further, it was clarified that moratorium is not a waiver of interest, but simply a deferment. If the banks were to do so, they would not be able to survive. The banks owe a duty to their depositors, and waiving of compound interest would fracture their interests. The Government bearing this burden would result in ignorance of several other direct costs associated with pandemic management.

Coming to the question of sector-specific reliefs, it was submitted that measures taken by the Government and RBI already include reliefs for the same. On the question of extending moratorium period, it requires expertise, technical knowledge of financing, and is best dealt with between the borrowers and lenders.

It is submitted that a National Plan was made in November, 2019. It is not possible to lay down a straight-jacket method of dealing with such a disaster, and each country is responding in the best way possible. Further, the argument that the NDMA becomes a repository of all functions and powers of the Ministries was rejected. NDMA itself would not start taking relief measures unless Ministries fail to do so. Each category of the disaster is to be dealt with by a nodal ministry.

Coming to Section 13, the counsel pointed out the use of the word ‘may,’ which makes it an enabling discretionary provision, not mandatory. The Section can be used in case of localized disasters, but a national disaster has to be managed through several ministries. The use of the word ‘shall’ would mean that the entire economy will be used in the banking sector, leaving all other sectors untouched.

The argument on the inaction of the NDMA was also rejected. The RBI circulars, along with the views and recommendations of the NDMA, plus the various governmental measures, constitute adequate measures of relief.

In Arun Kumar Agrawal V. UOI, it was held that the matters relating to economic issues, as long as they are done with bona fide intentions, cannot be questioned as arbitrary or illegal. In Metropolis Theatre V. Chicago, it was held that mere errors of the government are not subject to judicial review, unless expressly arbitrary. In Peerless General Finance and Investment V. RBI, it was held that Courts are not to interfere with economic policy, which is the function of experts.

It is further submitted that in the case of Railway Officers Association V. UOI, it is observed that on matters affecting policy and requiring technical expertise, the court would leave the matter for decision of those who are qualified to address the issue [Para 7.25.2].

Shri V. Giri, learned senior advocate on behalf of the RBI, submitted that the policies issued by the RBI were to mitigate the burden of debt servicing. The lending institutions were given the discretion to frame policies for relief, because they know best the requirements of their customers. He reiterated that banks are primarily custodians of depositors’ money, and cannot fail in their duty to pay interest to depositors on their deposits.

On the waiver of compound interest, the bank submitted that it entails significant costs which cannot be absorbed by the banks without serious debt. The ex-gratia scheme already enjoined the government to bear the costs of interest on MSME and personal loans up to Rs.2 crores.

Even extension of moratorium is a temporary relief, and brings heavy costs to the banks. So, it cannot be extended without vitiating the overall credit discipline and other problems to small borrowers.

RBI had constituted an Expert Committee under Shri KV Kamath, the recommendations of which have been accepted. The Committee concluded that it is not possible to arrive at any single formula to deal with the pandemic. It identified 26 sectors and rules for dealing with them.

Shri Harish Salve, learned Senior Advocate, appearing for Indian Banks Association, also argued against judicial review of policy decisions, particularly in economic issues. He also submitted that once a decision of various reliefs has been taken, unless it is arbitrary, it cannot be set aside, merely because some sectors are not agreeable.

He argued for the adequacy of RBI guidelines, and the various schemes announced by the Centre. He also pointed out the use of the word ‘may’ in Section 13.

Based on the above arguments and submissions, the Court held that it is not within the domain of the courts to enquire into the appropriateness of public policy. They cannot strike down a policy merely because a petitioner urges for a better policy.

Decisions regarding the national economy and financial reliefs are under the government and the RBI, with experts. They do not attract judicial review, unless expressly unfair, arbitrary or mala fide.

Secondly, the Government decides its own priorities and takes various measures in various sectors. Even it has suffered due to the lockdown, and still has come out with various packages. It has financial constraints, and therefore, no mandamus can be issued to it.

On total waiver of interest, the Court decided that this would have heavy financial implications on the economy, as well as the lenders. With regard to sector-specific demands, the Court stated that the Kamath committee provides for separate threshold to 26 sectors, including power and real estate.

The functions of the ministries do not devolve to the NDMA. Various ministries have to take relief measures within their spheres. Further, there is already a National Plan in place. The Court also reiterated the use of the word ‘may’ in Section 13. In this case, the Finance Ministry, RBI and Centre, have already made different packages in repayment of loans and grant of fresh loans.The recommendations of the NDMA were incorporated by the RBI in its Resolution Framework.

Lastly, the Court addressed the issue of penal interest, and found that there is no justification behind restricting relief only for loans up to Rs.2 crores, and that too, restricted to certain categories. This was regarded as arbitrary and discriminatory.

Even otherwise, interest on interest can be charged only in case of wilful default by the borrowers, which is not the case here. So, the Court directed that there shall not be any penal interest charged for the period of moratorium. As for the rest of the petitions, the Court held them to be dismissed.

It is directed that there shall not be any charge of interest on interest/compound interest/penal interest for the period during the moratorium and any amount already recovered under the same head, namely, interest on interest/penal interest/compound interest shall be refunded to the concerned borrowers and to be given credit/adjusted in the next instalment of the loan account(Para.32).

Navyaa Shukla



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