Now, what exactly is moratorium?
A moratorium period is the time during a loan term when the borrower is not required to make any repayment. It is a waiting period before which repayment of EMIs resumes. Moratoriums are often enacted in response to temporary financial hardships.
As a relief measure for people in view of the coronavirus pandemic, the Reserve Bank of India (RBI) on on March 27 allowed a three-month moratorium on term-loan and credit card repayments. Initially, the moratorium was for payment of all instalments falling due between March 1 and May 31, 2020. Then the RBI on 22 May extended moratorium on term loans till 31 August.
Lending institutions were directed to defer the EMIs of their customers opting for this moratorium scheme.
Well, according to the RBI, the deferred instalments under the moratorium would include
a) principal and/or interest components;
b) bullet repayments;
c) equated monthly instalments (EMIs);
d) credit card dues.
So, should one ideally opt for the RBI moratorium?
Well, the moratorium includes both the interest and principal component of your EMI.
If a customer has the liquidity, they should not opt for a moratorium. Repaying the loan amount is advised as interest continues to accrue on the loan amount even during the moratorium period. Repaying helps reduce the interest cost.
Now, a plea was filed by an Agra resident Gajendra Sharma, who has sought a direction to declare the portion of the RBI’s March 27 notification “as ultra vires to the extent it charges interest on the loan amount during the moratorium period, which create hardship to the petitioner being borrower and creates hindrance and obstruction in ‘right to life’ guaranteed by Article 21 of the Constitution of India”.
Supreme Court’s observations
On May 26th, the Supreme Court asked the Centre and the RBI to respond to the plea challenging levy of interest on loans during the moratorium period. The counsel argued that borrowers should not be penalised like this and banks should not add interest on the loan amount during the moratorium period.
On june 3rd the Reserve Bank of India, told the Supreme Court that a waiver of interest on loans will impact the financial viability of the country’s banks and will be harmful for the interests of depositors and the financial sector. Giving an illustrative example RBI also said that banks could forego about Rs 2 trillion in interest income if interests are waived off for the six months duration of the moratorium.
Next day, that is 4th June Supreme Court said that the government should not prioritise economics over health. The court observed that such a stand was “detrimental”, and sought a response from the finance ministry and the RBI. “While on one end you are granting moratorium, on the other nothing (no relief) on interest. This is more detrimental in such challenging times,” it said.
However, Supreme Court last Friday that is 12th June asked the Finance Ministry and the Reserve Bank of India to hold a meeting within three days and decide on waiver of interest on interest for deferred payments of loans during the moratorium period.
SC said it is not considering a full interest waiver during the moratorium period but is asking RBI to consider waiver of interest on interest for deferred payments during the moratorium period.
Today, the apex court asked the Central government to step up and take a stand over the issue related to charging interest on EMIs during the six month moratorium period.
SC asked the Central government and Reserve Bank of India to review the matter and slated it for further hearing in the first week of August.
Now, the question remains that Can banks afford to do so?
Solicitor General Tushar Mehta, appearing for the Centre and the Reserve Bank of India, told the apex court that waiving the interest completely will not be easy for banks as they have to pay interest to their depositors.
“There are Rs 133 trillion in deposits with banks and interest has to be paid on them and the waiver will have a cascading effect,” Mehta told the bench.
A bench headed by Justice Ashok Bhushan observed that once moratorium is fixed then it should serve the desired purposes and that the bench sees no merit in charging interest on interest
The bench, also comprising Justices S K Kaul and Justice M R Shah, orally observed that the government should consider interfering in the matter as it cannot leave everything to banks.
The bench asked the Indian Banks Association to examine whether they can bring new guidelines in the meantime on the issue of loan moratorium.