The moratorium was to provide for a temporary moratorium on the payment of principal and interest, thereby relieving borrowers in two ways, namely, that the account does not become an NPA despite non-payment of contributions; and in the absence of reporting to credit reporting companies, the moratorium did not negatively impact borrowers` credit history. The lender can wait for the instructions to be given by the government and the methodology prescribed by IBA. Logically, the same method as under the free rule should apply. As a result, lenders can arrange for the repayment of overcharged interest, and the reporting of these debts depends on whether or not they are granted by the government. In addition, it should be noted that while the bank lending moratorium period means that the bank does not recover its funds during the moratorium, the bank continues to incur costs for the bank`s deposits and borrowing. Since a moratorium provides certain benefits to borrowers, there are costs associated with obtaining the benefit of a moratorium, and placing the same burden on lenders could shift the burden to the country`s financial sector. If lenders were to bear this burden, it would necessarily wipe out a significant and significant portion of their net worth, making most banks viable and raising a very serious question about their survival. Even in the event of other disasters such as hurricanes, earthquakes, droughts or floods, lenders do not waive interest, but provide borrowers with the necessary assistance programs. A derogation may be granted by the Government only from the public treasury. It cannot come from a banking system in which loans are created solely from the depositor`s funds.
Any waiver will result in a deficit and a discrepancy between the Bank`s assets and liabilities. If the lending institution establishes a provision, can the borrower register a claim by crediting the interest paid or provided? The answer seems to be yes. With regard to accounting standards, the question whether the obligation to repay or adjust compound interest is a liability or a provision is resolved by reference to the provisions, contingent liabilities and contingent assets of Ind AS 37. Since the RBI circular can be considered a liability as of March 31, 2021, the lending institution may pay the difference [i.e. Compound interest – simple interest on the base amount] simply deposit into the client`s deposit account. If such a liability has been recorded, there is no question of provision. However, following the aforementioned decision, the Reserve Bank of India (“RBI”) issued a circular (“RBI Circular”) on April 7, 2021, directing financial institutions to take steps to collect/adjust interest rates. While the Supreme Court order clearly refers to the Ministry of Finance`s pro bono program, nowhere does the RBI mention the burden transferred to the Indian government. In view of this, during the moratorium, the government had granted a compound interest exemption limited to the most vulnerable categories of borrowers, i.e. loans to MSMEs and personal loans up to Rs 2 crore. Our article can be found here.
As the deadlines for applying under the voluntary program have passed, it was expected that the government would publish extended or updated operational guidelines for adjusting or repaying interest charged by lenders to borrowers. In addition, it appeared that the aforementioned court instructions would only apply to loan accounts that are eligible and have a moratorium under the COVID-19 package. However, the Supreme Court held that it was not justified to limit the relief of interest other than interest on interest only for loans up to Rs 2 crore, also to certain categories. Accordingly, the Supreme Court ordered that no interest be charged on interest/compound/penalty interest for the period during the moratorium and that any amount already recovered under the same heading, i.e. interest on interest/penalties/compound interest, be repaid to the borrowers concerned and credited/adjusted in the next tranche of the loan account. The SC command is a command of the UoI. The banks or NBFCs were also not parties to the claim, and it does not seem logical that the court order could require the parties to repay or adjust the interest they charged in accordance with their loan agreements. The U.S. may be obligated to provide a benefit as Covid assistance, but it doesn`t seem logical that the burden can be placed on each of the lending institutions, which, moreover, did not even have the opportunity to participate in the proceedings before the Apex Court. Compound interest continues to elude judicial acceptance – there are several judgments against compound interest in arbitral awards and much more for civil arbitral awards. Also in this case, the Supreme Court`s observations suggest that compound interest is criminal in nature. This may come as a surprise to a financier, as compound interest is ubiquitous and undeniable in the financial world.
The claimants argued that even the collection of interest on compound interest/interest could be expressed as penalty interest. It was also argued that penalty interest could only be charged for intentional non-compliance. Given the impact of the Covid19 pandemic and others, there has been a deferral of loan payments during the moratorium period in accordance with the RBI circulars, so there can be no question of intentional failure to justify interest/penalty interest/compound interest. The appeal was that no interest should be charged on interest, penalty interest and compound interest during the moratorium period.