No merit in 'charging interest on interest', rules Supreme Court

New Delhi: The Supreme Court Wednesday said there is "no merit in charging interest on interest" for deferred loan payment installments during the moratorium period announced in wake of the COVID-19 pandemic. A bench headed by Justice Ashok Bhushan observed that once moratorium is fixed then it should serve the desired purposes and the government should consider interfering in the matter as it cannot leave everything to banks.

"Once the moratorium is fixed then it should serve the desired purposes and we see no merit in charging interest on interest," the bench, also comprising Justices S K Kaul and Justice M R Shah, orally observed. The counsel for petitioner Gajendra Sharma, resident of Agra, said that under the Disaster Management Act, the Central Government has "ample power and jurisdiction" to grant relief with regard to loan which is specifically provided for.

The lawyer also said the circular of the Reserve Bank of India of March 27, granted moratorium but no substantial relief has been given to the borrowers. Noting the submission, the apex court said, "It is submitted that if moratorium is being granted for a period of three months, the entire amount payable including principal and interest should not be charged during moratorium period.

Secondly, at least the demand of interest on interest should not be made and these reliefs can be extended by the Central Government and the Reserve Bank of India." The bench, prima facie, was also of the same view but granted more time to the Centre and the RBI to have a re-look of the matter and posted it for hearing in the first week of August.

The bench adjourned the hearing for allowing the Centre and the RBI to review the situation and asked the Indian Banks Association to examine whether they can bring new guidelines in the meantime on the issue of loan moratorium. Mehta argued that complete waiver of interest during moratorium period might risk the financial stability of banks and this would put the interests of depositors in jeopardy.

The counsel representing banks association and State Bank of India (SBI) urged the bench that the matter should be deferred by three months.