The Supreme Court on Tuesday ruled in favour of waiving compound interest, that is, interest on interest, during the six-month moratorium announced by the Reserve Bank of India (RBI) last year. The apex court said that banks would not charge compound interest or penal interest on any amount during the moratorium period for all borrowers. The Supreme Court further directed banks to credit or adjust the amount already charged by them from borrowers.  

The top court’s ruling came on a batch of pleas filed by corporate bodies, business associations and individuals, demanding an extension of the moratorium beyond August 2020. The business associations had demanded an extension of this benefit to borrowers who had secured loans beyond Rs 2 crore. Earlier, on the Supreme Court’s insistence, the Centre had agreed to waive compound interest on loans for six categories of borrowers who had taken loans of up to Rs 2 crore.

The apex court also rejected pleas by various trade associations to extend the loan moratorium that ended in August last year. The court added that it could not do a judicial review of the Centre’s financial policy decision unless it was malafide and arbitrary.

Rejecting pleas for a complete waiver on interest, the court opined that such a move would have consequences on the economy. The Bench also said that interest waiver would affect depositors. Along with this, the court also rejected pleas for further relief in the matter.

Experts opine that the court’s ruling will help dispel confusion for banks on accounting of non-performing assets (NPAs). They add that the court’s decision dispels confusion for banks on NPA accounting and also provides clarity for borrowers who had availed themselves of the moratorium benefit on the amount they would need to repay up to their banks for the moratorium period.