The Supreme Court urged the Center to also take into account the suffering of borrowers when clarifying its position. | Photo credit: PTI
- The rationale for the moratorium was to ease the burden on borrowers who were financially affected by the foreclosure measures implemented and the economic paralysis it triggered.
- India’s central bank warned against waiving interest on suspended loan repayments, saying it could seriously endanger the health of India’s commercial banks
- The 6-month loan moratorium was widely welcomed by Indian borrowers, but experts at the time recommended that those who could continue to repay should
On Wednesday, the Supreme Court sought to arrest the Center for its inactivity to resolve the issue of accrued interest on loans during the 6-month moratorium period authorized by the Reserve Bank of India (RBI). At the end of March, following the implementation of a national lockdown due to the COVID-19 epidemic in the country and its devastating economic consequences, the RBI initially issued a three-month moratorium on reimbursements of loans, which she then extended for another three months. , allowing borrowers to defer their EMI payments until August 31.
The rationale for the moratorium was to ease the burden on borrowers who were financially affected by the foreclosure measures implemented and the economic paralysis it triggered.
SC seeks early resolution to help borrowers
In early June, in response to a Supreme Court opinion on a petition seeking a full waiver of interest accrued on borrowers’ EMI payments during the loan moratorium, the RBI filed an affidavit stating that the moratorium was only a deferral on loans and interest. until a time no later than March 31, 2021.
The RBI also noted that how this interest will be collected will be left to the credit institutions. India’s central bank has warned against waiving interest on suspended loan repayments, saying it could seriously endanger the health of Indian commercial banks. He objected to an earlier assessment made by the Supreme Court which said there was “no merit in charging interest on interest” for deferred loan payments, apparently arguing that the amount forfeited to banks would amount to more than 2,01,000 crore rupees or the equivalent of 1% of the country’s GDP.
Yet with the moratorium on loans set to end in just days, a bench of three Supreme Court judges objected to the finance ministry’s long delay in filing a sworn statement clarifying its position on the matter. accusing of “hiding behind the RBI”, and directing the Center to drop him within three days.
The bench said: “Now is not the time to think only about the business of the banks. The government must also take into account the suffering of borrowers. The Supreme Court also said that the Disaster Management Act has broad powers for the Center to act on the matter and make a decision.
What the moratorium means for borrowers
The 6-month loan moratorium was widely welcomed by Indian borrowers, but experts at the time recommended that those who could continue to repay should do so. Indeed, if interest is accrued on interest already charged on deferred payments, it could significantly increase the duration of loan repayments.
For example, if one were to avail of the moratorium on a 50 lakh loan with a repayment period of 15 years at a compound interest rate of 9%, a borrower could add an additional 18 IMEs at the end of the term. of his loan. .
The damage becomes magnified the longer the current repayment term or the higher the interest rate. As such, while the moratorium certainly brings immediate relief at a time when business activity has slowed down, demand has fallen sharply and millions of people have been put out of work, its significant effects on borrowers are expected to fade. make it felt in the medium and long term.