The Supreme Court on Tuesday ruled that compound interest on loans of all borrowers between March and August 2020 will be fully waived. This is nothing but a fiscal stimulus bearing an SC imprint and is, strangely, effective retrospectively. It may also be the first time interest-on-interest is being waived uniformly, which will cost the exchequer Rs 15,000 crore. Of this, the Centre had presumably spent Rs 5,500 crore.
Hearing a batch of petitions, a three-judge bench headed by Justice Ashok Bhushan refused to allow a complete waiver of interest on loans, which the government pegged at Rs 6 lakh crore. Such a sum could charge the earth and seriously impact the financial health of a string of banks. The SC also refused to extend the moratorium period beyond August 2020.
Last October, the Centre agreed to waive interest-on-interest component for retail and small business loans up to Rs 2 crore for six months. The benefit was extended to MSMEs, education loans, housing loans, loans for consumer durables, credit card dues, auto loans, personal and professional loans and consumption loans.
The waiver will now be extended to all borrowers, including large industries. Any amount collected as compound interest shall be adjusted to the next instalments payable. The SC also lifted asset standstill on loans. This means, banks are now free to classify loans as bad if they deemed so and make recoveries. It is estimated the NPAs will swell by Rs 1.3 lakh to Rs 8.5 lakh crore.
SC’s loan moratorium judgement: Everything borrowers need to know
The Supreme Court has ordered a waiver of compound interest for all borrowers. What does it mean for you? If you had availed a loan moratorium or deferred your EMI payments (including credit cards) that were due between March 1, 2020 and August 31, 2020, the interest is not waived off and will continue to accrue on the outstanding balance because the banks still have to pay interest to their depositors and pensioners.
During the moratorium period, however, the interest-on-interest or compound interest (which the SC terms as penal interest) is completely waived. This means that while banks have already refunded the compound interest paid by borrowers for loans below Rs 2 crore, now only the remaining (particularly, large industries) require to be paid. The refund or the compound interest shall be adjusted to the next installment payable instead of refunding it to the borrower irrespective of the loan amount in question.
Will the scheme be applicable to those who didn’t take the moratorium?
The government had in its October 2020 ruling specified that the scheme will be applicable irrespective of whether a borrower in the specified category took the moratorium fully, partially, or did not take it at all.
Who will bear the cost?
The government has specified that it will bear the cost. It is estimated that the scheme will cost the government Rs 14,000 crore, according to brokerage firm ICRA. While the total cost borne by the government for small ticket loans of up to Rs 2 crore was estimated to be Rs 6,500 crore, the extended waiver will cost an additional Rs 7,000-7,500 crore.
Will I still have to pay extra as interest, if I choose the moratorium?
Yes, you will be paying more as interest, if you choose to avail of the moratorium. Let us see how that works. For instance, you had taken a property loan of Rs 70 lakh at 9% interest for a period of 20 years. The monthly installment in this case comes to Rs 64,400. In case you chose to take the moratorium for three months, the interest will continue to accrue which comes to Rs 1,58,684. This will be added to your overall liability. So, the total amount payable will be Rs 1,54,58,049. In case the moratorium was not availed, then the total amount payable will be Rs 1,51,15,396. You will be paying a higher amount when you repay the EMIs because if you had not opted for the moratorium, you would have ended up saving Rs 3,42,653.
‘Fiscal policies not amenable to judicial review’
Noting that policy decisions are better left to the government and regulators, the bench said economic policies are not amenable to judicial review and court can’t interfere unless there are malafides and arbitrariness.